UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
40-F
 
 [  
      ]
              REGISTRATION
      STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF
      1934
 OR
 [X]
              ANNUAL
      REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF 1934
 For
      the fiscal year ended: December 31,
      2008
              Commission
      File Number: 1-2413
 CANADIAN
      NATIONAL RAILWAY COMPANY(Exact
      name of registrant as specified in its charter)Canada
              4011
              E.I.
      980018609(Jurisdiction
      of
              (Primary
      Standard Industrial
              (I.R.S.
      Employerincorporation
      or organization)
              Classification
      Code Number)
              Identification
      No.)
 
 935
de La Gauchetiere Street West
 Montreal,
Quebec
 Canada
H3B 2M9
 (514)
399-7091
 (Address,
including zip code, and telephone number including area code, of Registrant’s
principal executive offices)
 
 CT
Corporation System
 111
Eighth Avenue
 New
York, N.Y. 10011
 (212)
894-8600
 (Name,
address, including  zip code, and telephone number, including area
code, of agent for service in the United States)
 
 Securities
registered pursuant to Section 12(b) of the Act:
 
 Title
      of each class
              Name
      of each exchange on which registeredCommon
      shares
              New
      York Stock ExchangeToronto
      Stock Exchange
 
 Securities
registered pursuant to Section 12(g) of the Act: None
 Securities
for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Debentures and
Notes
 (Debt
Securities) of Registrant
 
 For
annual reports, indicate by check mark the information filed with this
Form:
  [X]
Annual information
form                                                           
 [   ] Audited annual financial statements
 
 Indicate
the number of outstanding shares of each of the issuer’s classes of capital or
common stock as of the close of the period covered by the annual
report:
 At
December 31, 2008, 468,158,739 common shares were issued and
outstanding.
 
 Indicate
by check mark whether the Registrant by filing the information contained in this
Form is also thereby furnishing the information to the Commission pursuant to
Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the “Exchange Act”).
If “Yes” is marked, indicate the file number assigned to the Registrant in
connection with such Rule.
 Yes o          No x
 Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
(or for such shorter period that the Registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days.
 Yes x         
No o
 
 
 
 
  CONTROLS
AND PROCEDURES
 
 Disclosure
Controls and Procedures
 
 Canadian
National Railway Company’s President and Chief Executive Officer (the “CEO”) and
its Executive Vice-President and Chief Financial Officer (the "CFO"), after
evaluating the effectiveness of Canadian National Railway Company’s "disclosure
controls and procedures" (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) as of December 31, 2008 (the “Evaluation Date”), have concluded that
as of the Evaluation Date, Canadian National Railway Company’s disclosure
controls and procedures were adequate and effective to ensure that material
information relating to Canadian National Railway Company and its consolidated
subsidiaries (the “Registrant” or the “Company”) would be made known to them by
others within those entities.
 
 Changes
in Internal Control Over Financial Reporting
 
 During
the year ended December 31, 2008, there was no change in Canadian National
Railway Company’s internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, Canadian National
Railway Company’s internal control over financial reporting.
 
 AUDIT
COMMITTEE FINANCIAL EXPERT
 
 The
Registrant’s board of directors has determined that it has several audit
committee financial experts serving on its Audit Committee. Mr. Hugh Bolton has
been determined to be an audit committee financial expert and is independent, as
that term is defined by the New York Stock Exchange’s listing standards
applicable to U.S. Companies. The SEC has indicated that the designation or
identification of Mr. Bolton as an audit committee financial expert does not
deem him an “expert” for any purpose, impose any duties, obligations or
liability on Mr. Bolton that are greater than those imposed on members of the
audit committee and board of directors who do not carry this designation or
identification, or affect the duties, obligations or liability of any other
member of the audit committee or board of directors.
 
 CODE
OF ETHICS
 
 The
Registrant has adopted a code of ethics (the “Code of Business Conduct”) that
applies to all employees and officers, including its principal executive
officer, principal financial officer and principal accounting officer. The Code
of Business Conduct is available at the Registrant’s Internet website, www.cn.ca
under the caption “Corporate Governance.” Any amendments to the Code of Business
Conduct will be posted at the Registrant’s Internet website at the address
listed above.
 
 PRINCIPAL
ACCOUNTANT FEES AND SERVICES
 
 KPMG LLP
has served as the Company’s auditors since 1992. In 2008 and 2007, fees for
audit, audit- related, tax and other services provided to the Company by KPMG
LLP were the following:
  2008(1)
              2007(1)Year
      ended December 31,
              (CAD$)
              (CAD$)Audit
      fees
              $2,794,000
              $3,
      170,000Audit-related
      fees
              1,170,000
              1,371,000Tax
      fees
              797,000
              603,000Other
      fees
              ——
              ——Total
              4,761,000
              $5,144,000(1)Fees rounded to the nearest
      thousand.
 
 Pursuant
to the terms of its charter, the Audit Committee of CN approves all audit and
audit-related services, audit engagement fees and terms and all non-audit
engagements with the independent auditor. The Audit Committee pre-approved 100%
of the services performed by our independent auditors for audit-related and tax
fees for the years ended December 31, 2008 and 2007 that were required to be
pre-approved.
  
  A
discussion of the nature of the services provided under each category is
provided below.
 
 Audit
fees
 
 Consists
of fees incurred for professional services rendered by the auditors in relation
to the audit of the Company’s consolidated annual financial statements and those
of its subsidiaries, and the audit relating to the Company’s internal control
over financial reporting.
 
 Audit-related
fees
 
 Audit-related
fees were incurred for professional services rendered by the auditors in
relation to the audit of the financial statements for the Company’s pension
plans, and for attestation services in connection with reports required by
statute or regulation and due diligence and other services, including comfort
letters, in connection with the issuance of securities.
 
 Tax
fees
 
 Consists
of fees incurred for consultations on cross-border tax implications for
employees and tax compliance.
 
 Other
fees
 
 Nil.
  OFF
BALANCE SHEET ARRANGEMENTS
 
 Accounts
receivable securitization program
 
 The
Company has a five-year agreement, expiring in May 2011, to sell an undivided
co-ownership interest for maximum cash proceeds of $600 million in a revolving
pool of freight receivables to an unrelated trust. The trust is a multi-seller
trust and the Company is not the primary beneficiary. The trust was established
in Ontario in 1994 by a Canadian bank to acquire receivables and interests in
other financial assets from a variety of originators. Funding for the
acquisition of these assets is customarily through the issuance of asset-backed
commercial paper notes. The notes are secured by, and recourse is limited to,
the assets purchased using the proceeds of the notes. At December 31, 2008, the
trust held interests in 16 pools of assets and had notes outstanding of $3.3
billion. Pursuant to the agreement, the Company sells an interest in its
receivables and receives proceeds net of the required reserve as stipulated in
the agreement. The required reserve represents an amount set aside to allow for
possible credit losses and is recognized by the Company as a retained interest
and recorded in Other current assets in its Consolidated Balance Sheet. The
eligible freight receivables as defined in the agreement may not include
delinquent or defaulted receivables, or receivables that do not meet certain
obligor-specific criteria, including concentrations in excess of prescribed
limits with any one customer.
 
 The
Company has retained the responsibility for servicing, administering and
collecting the receivables sold and receives no fee for such ongoing servicing
responsibilities. The average servicing period is approximately one month. In
2008, proceeds from collections reinvested in the securitization program were
approximately $3.3 billion. At December 31, 2008, the servicing asset and
liability were not significant. Subject to customary indemnifications, the
trust’s recourse is generally limited to the receivables.
 
 The
Company accounted for the accounts receivable securitization program as a sale,
because control over the transferred accounts receivable was relinquished. Due
to the relatively short collection period and the high quality of the
receivables sold, the fair value of the undivided interest transferred to the
trust approximated the book value thereof. As such, no gain or loss was
recorded.
  
 The
Company is subject to customary requirements that include reporting requirements
as well as compliance to specified ratios for which failure to perform could
result in termination of the program. In addition, the trust is subject to
customary credit rating requirements, which if not met, could also result in
termination of the program. The Company monitors its requirements and is
currently not aware of any trends, events or conditions that could cause such
termination.
 
 The
accounts receivable securitization program provides the Company with readily
available short-term financing for general corporate use. Under the terms of the
agreement, the Company may change the percentage of co-ownership interest sold
at any time. In the event the program is terminated before its scheduled
maturity, the Company expects to meet its future payment obligations through its
various sources of financing, including its revolving credit facility and
commercial paper program, and/or access to capital markets.
 
 At
December 31, 2008, the Company had sold receivables that resulted in proceeds of
$71 million under the accounts receivable securitization program ($588 million
at December 31, 2007), and recorded the retained interest of approximately 10%
of this amount (retained interest of approximately 10% recorded at December 31,
2007). The fair value of the retained interest approximated carrying value as a
result of the short collection cycle and negligible credit losses.
 
 Guarantees
and indemnifications
 
 In the
normal course of business, the Company, including certain of its subsidiaries,
enters into agreements that may involve providing certain guarantees or
indemnifications to third parties and others, which may extend beyond the term
of the agreement. These include, but are not limited to, residual value
guarantees on operating leases, standby letters of credit and surety and other
bonds, and indemnifications that are customary for the type of transaction or
for the railway business.
 
 The
Company is required to recognize a liability for the fair value of the
obligation undertaken in issuing certain guarantees on the date the guarantee is
issued or modified. In addition, where the Company expects to make a payment in
respect of a guarantee, a liability will be recognized to the extent that one
has not yet been recognized.
 
 The
nature of these guarantees or indemnifications, the maximum potential amount of
future payments, the carrying amount of the liability, if any, and the nature of
any recourse provisions are disclosed in Note 17 – Major commitments and
contingencies, to the Company’s Annual Consolidated Financial
Statements.
 
 TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
  In the
normal course of business, the Company incurs contractual obligations. The
following table sets forth the Company’s contractual obligations for the
following items as at December 31, 2008:
  In
      millions
              
              Total
              
              
              2009
              
              
              2010
              
              
              2011
              
              
              2012
              
              
              2013
              
              
              2014
      &
                thereafterLong-term
      debt obligations (a)
              
              $
              6,599
              
              
              $
              367
              
              
              $
              -
              
              
              $
              1,112
              
              
              $
              -
              
              
              $
              486
              
              
              $
              4,634Interest
      on long-term debt obligations
              
              
              6,665
              
              
              
              377
              
              
              
              361
              
              
              
              357
              
              
              
              315
              
              
              
              304
              
              
              
              4,951Capital
      lease obligations (b)
              
              
              1,837
              
              
              
              207
              
              
              
              158
              
              
              
              199
              
              
              
              96
              
              
              
              145
              
              
              
              1,032Operating
      lease obligations (c)
              
              
              876
              
              
              
              166
              
              
              
              134
              
              
              
              112
              
              
              
              87
              
              
              
              65
              
              
              
              312Purchase
      obligations (d)
              
              
              1,006
              
              
              
              457
              
              
              
              260
              
              
              
              83
              
              
              
              61
              
              
              
              57
              
              
              
              88Other
      long-term liabilities reflected onthe balance sheet (e)
              
              
              813
              
              
              
              73
              
              
              
              62
              
              
              
              51
              
              
              
              45
              
              
              
              43
              
              
              
              539Total
      obligations
              
              $
              17,796
              
              
              $
              1,647
              
              
              $
              975
              
              
              $
              1,914
              
              
              $
              604
              
              
              $
              1,100
              
              
              $
              11,556
   
  (a)
              Presented
      net of unamortized discounts, of which $835 million relates to
      non-interest bearing Notes due in 2094, and excludes capital lease
      obligations of $1,312 million which are included in “Capital lease
      obligations.”
  (b)
              Includes
      $1,312 million of minimum lease payments and $525 million of imputed
      interest at rates ranging from 2.1% to
7.9%.
 
 (c)
              Includes
      minimum rental payments for operating leases having initial non-cancelable
      lease terms of one year or more. The Company also has operating lease
      agreements for its automotive fleet with minimum one-year non-cancelable
      terms for which its practice is to renew monthly thereafter. The estimated
      annual rental payments for such leases are approximately $30 million and
      generally extend over five years.
 
 (d)
              Includes
      commitments for railroad ties, rail, freight cars, locomotives and other
      equipment and services, and outstanding information technology service
      contracts and licenses.
 
 (e)
              Includes
      expected payments for workers’ compensation, workforce reductions,
      postretirement benefits other than pensions and environmental liabilities
      that have been classified as contractual settlement
      agreements.
 
 For 2009
and the foreseeable future, the Company expects cash flow from operations and
from its various sources of financing to be sufficient to meet its debt
repayments and future obligations, and to fund anticipated capital
expenditures.
 
 See the
Business risks section of the attached Management’s Discussion and Analysis for
a discussion of assumptions and risk factors affecting such forward-looking
statement.
 
 IDENTIFICATION
OF THE AUDIT COMMITTEE
 
 The
Registrant’s audit committee is composed of the following directors: Denis
Losier (Chair), Michael R. Armellino, A. Charles Baillie, Hugh J. Bolton, Robert
H. Lee and Robert Pace.
 
 CORPORATE
GOVERNANCE PRACTICES
 
 The
Registrant’s board of directors has also reviewed the Registrant’s corporate
governance practices in response to the U.S. Sarbanes-Oxley Act of 2002,
applicable rules of the U.S. Securities and Exchange Commission, as well as the
NYSE Corporate Governance Standards (the “NYSE Standards”). The board of
directors will continue to review its corporate governance practices regularly
in response to the evolving standards. Except as disclosed on its website, the
Registrant’s corporate governance practices do not differ significantly from
that followed by U.S. domestic companies under the NYSE Standards. A discussion
of differences is available at the Registrant’s Internet website, www.cn.ca
under the caption “Corporate Governance”.
 
 UNDERTAKING
 
 Registrant
undertakes to make available, in person or by telephone, representatives to
respond to inquiries made by the Commission staff, and to furnish promptly, when
requested to do so by the Commission staff, information relating to the
securities in relation to which the obligation to file an annual report on Form
40-F arises.
 
 
 CANADIAN
NATIONAL
 RAILWAY
COMPANY
 
 
 
 
 
 
 
 
 
 2008
 
 ANNUAL
INFORMATION FORM
 
 
 
 
 
 
 
  
 February
5, 2009
   
 TABLE
      OF CONTENTSAnnual
                  Management'sInformation
                  Discussion
      &Form
                  Analysis(as
      filed onFebruary
      5, 2009)Incorporated
      byReferenceItem
      1
                  
                  General
      Information
                  3Item
      2
                  
                  Incorporation
                  32.1
                  
                  Incorporation
      of the Issuer
                  32.2
                  
                  Subsidiaries
                  4Item
      3
                  
                  General
      Development of the Business
                  43.1
                  
                  General
      Development of the Business During the Last Three Years
                  43.2
                  
                  Anticipated
      Developments
                  11
                  42-44Item
      4
                  
                  Description
      of the Business
                  114.1
                  
                  Overview
                  114.2
                  
                  Commodity
      Groups
                  12
                  47-524.3
                  
                  Competitive
      Conditions
                  12
                  80-814.4
                  
                  Labor
                  12
                  82-834.5
                  
                  Social
      Policies
                  124.6
                  
                  Regulation
                  13
                  83-854.7
                  
                  Environmental
      Matters
                  14
                  73-75,
      814.8
                  
                  Legal
      Matters
                  16
                  72-734.9
                  
                  Risk
      Factors
                  17
                  80-88Item
      5
                  
                  Dividends
                  17Item
      6
                  
                  Description
      of Capital Structure
                  176.1
                  
                  General
      Description of Capital Structure
                  176.2
                  
                  Share
      Ownership Constraints
                  186.3
                  
                  Ratings of
      Debt Securities
                  19Item
      7
                  
                  Transfer
      Agent and Registrar
                  20Item
      8
                  
                  Market
      for Securities
                  208.1
                  
                  Trading Price
      and Volume
                  208.2
                  
                  Prior
      Sales
                  20Item
      9
                  
                  Directors
      and Executive Officers
                  219.1
                  
                  Directors
                  219.2
                  
                  Audit
      Committee Disclosure
                  239.3
                  
                  Executive
      Officers
                  259.4
                  
                  Cease Trade
      Orders, Bankruptcies, Penalties or Sanctions
                  26Item
      10
                  
                  Interest
      of Experts
                  27Item
      11
                  
                  Additional
      Information
                  27Schedule  A
                  
                  Charter of
      the Audit Committee
                  28
  2
 
 ITEM
1          GENERAL
INFORMATION
 
 Except as otherwise
indicated in this Annual Information Form (“AIF”), the information contained
herein is given as of December 31, 2008. All references in this AIF to “dollars”
or “$” are to Canadian dollars and all financial information reflected herein is
determined on the basis of, and prepared in accordance with, United States
generally accepted accounting principles (“U.S. GAAP”), unless otherwise
indicated.
 
 Certain statements
contained in this AIF or incorporated by reference herein may be
“forward-looking statements” within the meaning of the United States Private
Securities Litigation Reform Act of 1995 and under Canadian securities laws. All
statements, other than statements of historical facts, included or incorporated
by reference herein that address activities, events or developments that the
Company expects or anticipates will or may occur in the future, including such
things as future capital expenditures (including the amount and nature thereof),
business strategies and measures to implement strategies, competitive strengths,
goals, expansion and growth of its business and operations, plans and references
to the future success of the Company, and other such matters, are
forward-looking statements. CN cautions that, by their nature, forward-looking
statements involve risk, uncertainties and assumptions. Implicit in these
statements, particularly in respect of long-term growth opportunities, is the
Company’s assumption that such growth opportunities are less affected by the
current situation in the North American and global economies. The assumptions
used by the Company to prepare its forward-looking statements, although
considered reasonable at the time of preparation, may not materialize. Such
forward-looking statements are not guarantees of future performance and involve
known and unknown risks, uncertainties and other factors, which may cause the
actual results or performance of the Company or the rail industry to be
materially different from the outlook or any future results or performance
implied by such statements. Important factors that could cause such differences
include, but are not limited to, industry competition, legislative and/or
regulatory developments, compliance with environmental laws and regulations,
various events, which could disrupt operations, including natural events such as
severe weather, droughts, floods and earthquakes, the effects of adverse general
economic and business conditions, inflation, currency fluctuations, changes in
fuel prices, labor disruptions, environmental claims, investigations or
proceedings, other types of claims and litigation, and other risks detailed from
time to time in reports filed by CN with securities regulators in Canada and the
United States. Moreover, the current situation in financial markets is adding a
substantial amount of risk to the North American economy, which is already in
recession, and to the global economy, which is significantly slowing down.
Reference should be made to the discussion of these risk factors in CN’s 2008
Annual Consolidated Financial Statements and Notes thereto and Management’s
Discussion and Analysis, for a summary of major risks, which documents may be
found on SEDAR at www.sedar.com
and on EDGAR at www.sec.gov.
 
 The Company assumes
no obligation to update or revise forward-looking statements to reflect future
events, changes in circumstances, or changes in beliefs, unless required by
applicable laws. In the event the Company does update any forward-looking
statement, no inference should be made that it will make additional updates with
respect to that statement, related matters, or any other forward looking
statement.
  ITEM
2          INCORPORATION
 2.1         
INCORPORATION OF THE ISSUER
 
 Canadian National
Railway Company (“CNR”) was incorporated in 1922 by special act of the
Parliament of Canada. CNR’s continuance under the Canada Business Corporations
Act was authorized by the CN Commercialization Act and
was effected by Certificate of Continuance dated August 24, 1995. On November 9,
1995, CNR filed Articles of Amendment in order to subdivide its outstanding
common shares (the “Common Shares”). As of November 28, 1995, CNR ceased to be a
Crown corporation and became a publicly held corporation with its Common Shares
listed on the New York Stock Exchange (“NYSE”) and the Toronto Stock Exchange
(“TSX”). On April 19, 2002, CNR filed Articles of Amendment in order to provide
that shareholder meetings may be held at certain specified places in the United
States. Such constating documents are hereinafter collectively referred to as
the “Articles”.
  3
 
 As
used herein, the word “Company” or “CN” means, as the context requires, CNR
and/or its subsidiaries.
 
 The Company’s
registered and head office is located at 935 de La Gauchetière Street West,
Montréal, Quebec, H3B 2M9, Canada, and its telephone number is
1-888-888-5909.
 
 2.2          SUBSIDIARIES
 
 CN’s principal
subsidiaries as of December 31, 2008, all of which are wholly owned (directly or
indirectly), and their jurisdiction of incorporation, are indicated
below:
 
 Name
                  Jurisdiction
      ofIncorporationGrand Trunk
      Corporation
                  DelawareGrand Trunk
      Western Railroad Company (“GTW”)
                  DelawareIllinois
      Central Corporation (“IC”)
                  DelawareIllinois
      Central Railroad Company (“ICRR”)
                  IllinoisWisconsin
      Central Transportation Corporation (“WC”)
                  DelawareWisconsin
      Central Limited
                  Illinois
 
 The financial
statements of each of the above principal subsidiaries are consolidated within
CN’s financial statements.
 
 ITEM
3          GENERAL DEVELOPMENT OF THE
BUSINESS
 
 3.1          GENERALDEVELOPMENT OF
THEBUSINESSDURING
THELASTTHREEYEARS
 
 CN’s goal is to
grow the business profitably, creating value for its customers and generating an
adequate and sustainable return on capital invested. To reach that goal, CN
focuses on strategies and initiatives that allow it to continually improve
service, seize upon a range of business opportunities, and achieve productivity
gains throughout the organization. The initiatives undertaken by CN in the last
three years to achieve its growth and profitability goals and to enhance
shareholder value can be grouped into a few key areas. These include
acquisitions and dispositions, targeted capital investment spending and other
initiatives to strengthen the Company’s position in the marketplace, cooperation
and co-production agreements with other carriers, as well as financial
management initiatives as described below:
  2008
Highlights
 
 Acquisitions
and Dispositions
 
 In November 2008,
CN completed the acquisition of the three principal railway subsidiaries of the
Quebec Railway Corp. (“QRC”) and a QRC rail-freight ferry operation for $C50
million. CN sold the rail lines to QRC in the late 1990s and held a minority
equity interest in the ferry operation since its start-up in 1975. Included in
the purchase were the following railways and management company:
 
 ●
                  Chemin de fer
      de la Matapédia et du Golfe (“CFMG“)
:
 
 CFMG has 221 miles
of track, interchanging with CN at Rivière-du-Loup, Quebec. It runs from
Rivière-du-Loup, Quebec, to Campbellton, New Brunswick, where it meets QRC’s New
Brunswick East Coast Railway. CFMG also has a line between Mont-Joli and Matane,
Quebec, where a rail ferry operates to the north shore of the St. Lawrence
River. CFMG serves major shippers of aluminum, paper and forest products. VIA
Rail Canada Inc.
  4
 
 (“VIA Rail”) uses
the line between Rivière-du-Loup and Campbellton for its Maritime service
between Montreal and Halifax.
 
 ●
                  New Brunswick
      East Coast Railway (“NBEC“):
 
 The NBEC runs
between Campbellton and Pacific Junction near Moncton, New Brunswick. It is 196
miles long and interchanges with CN at Moncton Yard. In tandem with CFMG, the
NBEC serves major shippers mainly in the mining and pulp and paper industries.
VIA Rail uses the line between Campbellton and Pacific Junction for its
Montreal-Halifax service.
 
 ●
                  Ottawa
      Central Railway (“OCR“):
 
 The 123 mile long
OCR runs between Coteau, Quebec, where it interchanges with CN, and Pembroke,
Ontario. It also serves Hawkesbury, Ontario. Between Coteau and Ottawa, the OCR
operates over VIA Rail trackage. Major commodities carried by the OCR include
newsprint, salt, forest products, steel wire rod and billets.
 
 ●
                  Compagnie de
      gestion de Matane inc.
(“COGEMA“):
 
 COGEMA provides
shuttle boat-rail freight service on the St. Lawrence River between Matane and
Baie-Comeau, Quebec, and other ports on the North Shore of the Gulf of St.
Lawrence when required. The rail ferry has a capacity of 25 rail cars. CFMG
connects with the ferry at Matane and interchanges traffic with CN at
Rivière-du-Loup.
 CN intends to
invest capital over the next three years to upgrade the rail lines of the
acquired properties, and will replace the existing locomotive fleet with more
modern motive power. As part of the transaction, CN will also assume the
operation and management contract for the Chemin de fer de la Gaspésie, which
runs from Matapédia to Gaspé, Quebec.
 
 In December 2008,
the Company received the last of the necessary regulatory approvals for its
acquisition of the Elgin, Joliet and Eastern Railway Company (“EJ&E”),
including the U.S. Surface Transportation Board (“STB”) ruling on December 24,
2008. The Company completed its acquisition of the EJ&E on January 31, 2009
for a purchase price of $US300 million paid with cash on hand. The acquisition
is expected to drive new efficiencies and operating improvements on CN’s network
as a result of streamlined rail operations and reduced congestion. Under the
terms of the agreement, U.S. Steel’s Transtar subsidiary retains railroad
assets, equipment and employees that support the Gary Works site in Northwest
Indiana and the steelmaking operations of U.S. Steel. These remaining operations
will become the Gary Railway. EJ&E, a Class II railroad, operates over 198
main line miles of track encircling the City of Chicago from Waukegan, Illinois,
on the north, to Joliet, Illinois, on the west, to Gary, Indiana, on the
southeast, and then to South Chicago. Over the next few years, the Company has
committed to spend approximately US$100 million for infrastructure improvements
and over US$60 million under a series of mitigation agreements with individual
communities, as well as under a comprehensive voluntary mitigation program that
addresses municipalities’ concerns raised during the regulatory approval
process. Expenditures for additional STB-imposed mitigation are being currently
evaluated by the Company.
 
 Strategic
Initiatives and Capital Spending
 
 CN’s capital
expenditures were $1.54 billion company-wide in 2008, of which about $1 billion
was focused on track infrastructure and included replacement of rail, ties and
other track materials, and bridge improvement. Of that amount, $400 million was
devoted to rail infrastructure projects in CN’s Western Region where the Company
also invested in extended sidings and terminal improvements to grow its business
and permit more efficient movement of traffic in western Canada, including CN’s
line to the new Port of Prince Rupert container terminal, as well
as
  5
 
 upgrading its
recently acquired Athabasca Northern Railway (“ANY“). The ANY terminates near
Fort McMurray, Alberta, and is an important rail link to the oilsands region of
Northern Alberta. In addition, CN continued upgrading other former Northern
Alberta short lines purchased in 2006. In the Eastern Region, CN spent close to
$300 million in rail infrastructure to preserve the quality and integrity of the
physical plant. Included in the approximately US$300 million spent on rail
infrastructure projects in the United States, is the completion of the Company’s
multi-year US$100-million upgrade of Johnston Yard in Memphis in 2008, and an
investment in new and extended sidings to permit more efficient operations. The
Company also continued its investment in equipment spending, which reached
approximately $200 million in 2008 and included the acquisition of new
fuel-efficient locomotives, as well as improvements to the existing fleet. CN
also spent approximately $300 million on facilities to grow the business,
including transloads and distribution centers, information technology to improve
service and operating efficiency, and other projects to increase
productivity.
  In October 2008, CN
committed to the acquisition of 232 rapid-discharge ore cars and the
refurbishment of 500 existing ore cars as part of a long-term plan to upgrade
the Company’s car fleet for transporting pelletized iron ore produced in the
Upper Midwest with expected delivery of the new ore cars starting in January
2009. The refurbishment of 500 existing ore cars began in 2008 and included the
installation of new trucks and couplers, modernizing the braking system and
repairing outlet gates. CN foresees acquiring more new iron ore cars over the
next three to five years that will permit the retirement of an equivalent number
of cars from CN’s existing fleet. The fleet renewal program is designed to
increase rail efficiency and deliver better service to CN’s iron-ore customers
including those for whom CN hauls pelletized iron ore in unit trains from mines
in northern Minnesota and Michigan primarily to Great Lakes ports for
transportation to North American steel producers as well as to overseas
markets.
 
 In December 2008,
CN ordered 40 additional high-horsepower locomotives from Electro-Motive Diesel,
Inc. (“EMD”) and secured an option for 50 more of the EMD locomotives. The 40
EMD SD70M-2 locomotives are scheduled for delivery in early 2010, with an option
for 50 more of the 4,300 horsepower locomotives by 2011. This acquisition will
enable retirement of older locomotives and the new EMD locomotives will be up to
20 per cent more fuel efficient than the ones they replace and comply fully with
the latest regulatory requirements for reduced locomotive emissions. All of the
new locomotives will have improved crew cabs that will also be isolated from the
frame to reduce noise and vibration for train personnel. In addition, the units
will be equipped with distributed power (“DP”) capability. DP enables remote
control of a locomotive or locomotives throughout a train from the lead control
locomotive. DP provides faster, smoother starting, improved braking and lower
pulling forces at the head-end of a train. In addition, it significantly reduces
the time required to charge a train's air brake system, a major benefit in cold
weather conditions that can slow the rate at which air brakes are
charged.
 
 Financial
Management Initiatives
 
 In May 2008, CN
closed a US$650 million debt offering of US$325 million (Cdn$331 million) 4.95%
Notes due 2014, and US$325 million (Cdn $331 million) 5.55% Notes due 2018. CN
used the net proceeds of US$643 million from the offering to repay a portion of
its commercial paper outstanding, and to reduce its accounts receivable
securitization program. The indebtedness that was repaid had been incurred for
general corporate purposes, including CN’s share repurchase program. The debt
offering was made in the United States under the shelf registration statement CN
filed in December 2007. Please see section 8.2 of this document for a further
discussion of this matter.
 
 In July 2008, the
Board of Directors of the Company approved a new share repurchase program, which
allows for the repurchase of up to 25.0 million Common Shares between July 28,
2008 and July 20, 2009 pursuant to a normal course issuer bid, at prevailing
market prices or such other price as may be permitted by the TSX. As at December
31, 2008, under this current share repurchase program, 6.1 million Common Shares
have been repurchased for $331 million, at a weighted-average price of $54.42
per share. The Company’s previous share repurchase program, initiated in July
2007, allowed for the repurchase of up to 33.0 million Common Shares between
July 26, 2007 and July 25, 2008, pursuant to a normal course issuer bid, at
prevailing market prices. In June 2008, the Company ended
 
 6
  this share
repurchase program under which it repurchased 31.0 million Common Shares for
$1,588 million at a weighted-average price of $51.22 per share.
 
 Significant
Cooperation Agreements
 
 As part of an
ongoing effort to improve productivity and capacity, CN periodically enters into
cooperation agreements with other carriers, including track and infrastructure
exchanges, co-production, haulage and track access agreements, as well as
routing protocols that endeavour to emphasize more efficient interchanges to
bypass congested terminals. In 2008, CN concluded several such cooperation
agreements, including the following:
 
 In July 2008, CN
and Canadian Pacific Railway Company (“CP”) formalized an agreement allowing the
Deltaport Division of a jointly owned rail subsidiary to manage rail switching
operations for CN’s and CP’s intermodal trains at Deltaport, a marine container
terminal located at Roberts Bank, 40 kilometres south of Vancouver's inner
harbour. The Deltaport Division was designed to streamline the logistics chain
at the terminal, generating greater efficiencies in the overall rail and port
operation with the resulting service and productivity gains to support Canada’s
Asia-Pacific Gateway Initiative aimed at bolstering the competitiveness of the
nation’s west coast ports. CN and CP move significant container volumes into and
out of Deltaport each month. Container cars must be switched into the terminal
tracks for loading and unloading. The railways’ Deltaport switching agreement
represents another positive development in CN’s and CP’s directional running
zone in the Fraser Canyon and co-production operating agreements in the greater
Vancouver area.
  2007
Highlights
 
 Acquisitions
and Dispositions
 
 In
September 2007, CN entered into an agreement with the U.S. Steel Corporation
(“U.S. Steel”) for the acquisition of the key operations of EJ&E. Please see
the 2008 Highlights, above, for a further discussion of this
acquisition.
 
 In November 2007,
CN finalized an agreement with Homburg Invest Inc. to sell its Central Station
Complex in Montreal for proceeds of $355 million before transaction costs. Under
the agreement, CN has entered into long-term arrangements to lease back its
corporate headquarters building and the Central Station railway passenger
facilities.
 
 In November 2007,
Germany’s state-owned railway, Deutsche Bahn AG, acquired all of the shares of
the English Welsh and Scottish Railway (“EWS”), a company that provides most of
the rail freight services in Great Britain and operates freight trains through
the English Channel Tunnel, and in which the Company had a 32% ownership
interest, for which CN accounted using the equity method. The Company’s share of
the cash proceeds was $114 million. Pursuant to the sale of the Company's
investment in EWS, an additional amount of £18 million (Cdn$36 million) was
placed in escrow and will be recognized when defined contingencies are resolved.
At December 31, 2008, £12 million (Cdn$22 million) remained in
escrow.
 
 In December 2007,
CN acquired the rail assets of the ANY to preserve a critical rail link to the
oil sands region of northern Alberta. CN’s purchase and rail-line rehabilitation
plan was premised on long-term traffic volume guarantees that the Company has
negotiated with shippers Suncor Energy Inc., OPTI Canada Inc., and Nexen Inc. CN
paid $25 million for ANY, with a planned investment of $135 million in rail-line
upgrades over a four-year period to improve transit times and service
consistency. The 202-mile ANY connects with CN at Boyle, Alberta, located 101
miles north of Edmonton. CN’s plans for the line are designed to preserve market
access to existing and potential receivers along the rail corridor and to
accommodate any increased volumes that may move over the line in the future to
support oil sands development.
 
 Strategic
Initiatives and Capital Spending
 
 In April 2007, CN set up CN WorldWide North America to manage and expand the scope and scale of the
 
 7
 Company’s existing
non-rail capabilities, such as warehousing and distribution, customs services,
truck brokerage and supply chain visibility tools across North
America.
  In
June 2007, CN committed itself to the acquisition of 65 new fuel-efficient,
high-horsepower locomotives scheduled for delivery over a two-year period. These
are in addition to the 65 locomotives previously ordered for delivery in 2007.
In addition to offering improved reliability, the new units are about 15 per
cent more fuel efficient than the locomotives they will replace, and will comply
fully with the latest regulatory requirements for reduced locomotive emissions.
The new locomotive orders are part of a major fuel conservation program by CN
and will ultimately permit the retirement of 145 older locomotives. All of these
130 new locomotives CN ordered, the last of which are being delivered in Q1
2009, are equipped with distributed power capability, which allows them to be
placed in the middle of a freight train and to be remotely controlled from the
lead locomotive. Distributed power technology improves fuel efficiency and train
handling, and permits CN to maximize the productivity gains associated with its
extended siding program.
  In October 2007,
operations commenced at the Port of Prince Rupert container terminal. CN, in
partnership with the Prince Rupert Port Authority and Maher Terminals, seeks to
offer the marketplace faster, more efficient and more cost-effective routing
than previously available for Asian traffic destined to and from the interior of
North America, including the cities of Chicago, Memphis, Toronto and Montreal.
As the closest port to northeast Asia by up to 58 hours of sailing time compared
to any other west coast port in North America, the Port of Prince Rupert gives
shippers approximately one extra round-trip voyage per year. The Port is
strategically located to handle excess capacity on one of the world's busiest
shipping corridors. The official opening for business of the terminal, with the
first major customer, COSCO Container Lines Americas, Inc., signed on, has
helped to establish CN as a key player serving North America’s newest Pacific
Gateway. CN plans continued investment in its western Canadian network, which
benefits Canada's Pacific Gateway. These improvements, which have already begun,
include upgrades to rail traffic control systems west of Prince George and
extended sidings that will increase capacity in the corridor from Prince Rupert
through to Memphis. CN has upgraded tunnels and bridges, built new intermodal
terminals in Prince George and Edmonton, and acquired 2,250 platform cars and 50
new state-of-the-art locomotives specifically to serve this
gateway.
  In October 2007, CN
began operation of its Prince George intermodal and distribution centre
terminal. Prince George, situated 500 miles east of Prince Rupert, is in close
proximity to British Columbia’s large fibre reserves and other natural resources
and is CN’s divisional headquarters and main operations hub in northern B.C.
Built by CN at a cost of $20 million, the Prince George facility is ideally
located to tap backhaul export opportunities, filling empty containers moving to
Asia via Prince Rupert with lumber, panels, woodpulp and paper. It is designed
to help CN maximize revenue potential generated from the new terminal at Prince
Rupert. The Prince George Distribution Centre has an 84,000 square-foot
warehouse and 10 acres of outside storage. A full range of services will be
provided by CN WorldWide North America, including product transfer, inspection,
consolidation/deconsolidation, inventory control and transportation. Loaded
containers will be lifted onto railway flatcars at CN’s new adjacent intermodal
rail yard, which features two 2,400-foot pad tracks, trucking and truck-pick-up
capabilities and an automated gate system. CN is providing direct, daily rail
service from the Prince George facility to the Port of Prince
Rupert.
 
 In 2007, CN’s
capital expenditure was close to $1.7 billion. Excluding the $90 million capital
lease for the Montreal Central Station Complex, the capital spending was about
$1.6 billion, which amounted to approximately 20% of revenues and an increase of
three per cent over the 2006 level. Of this, more than $1 billion was targeted
towards track infrastructure to maintain a safe railway and to improve the
productivity and fluidity of the network and includes the replacement of rail,
ties and other track materials, as well as the improvement of bridges. This
amount also included funds for strategic initiatives, such as siding extensions
to accommodate container traffic from the Prince Rupert Intermodal Terminal, the
upgrade of the Company’s freight car classification yard in Memphis, Tennessee,
and additional enhancements to the track infrastructure in western Canada to
take advantage of growth prospects in North American trade with Asia and
emerging opportunities in western Canada. CN spent approximately $300
million
 
 8
  on rolling stock in
2007 to tap growth opportunities and to improve the quality of the fleet to meet
customer requirements. The Company continued its locomotive fleet modernization
program with the acquisition of 85 new high-horsepower fuel-efficient units and
ongoing locomotive overhauls. CN also spent more than $300 million on facilities
to grow the business, including transloads and distribution centres, on
information technology to improve service and operating efficiency, as well as
on other projects to increase productivity.
 
 Financial
Management Initiatives
 
 As mentioned above
in the 2008 Highlights, in July 2007, the Board of Directors of the Company
approved a share repurchase program, which allowed for the repurchase of up to
33.0 million Common Shares between July 26, 2007 and July 25, 2008 pursuant to a
normal course issuer bid, at prevailing market prices or such other price as may
be permitted by the Toronto Stock Exchange. In June 2008, the Company ended this
repurchase program under which it repurchased 31.0 million Common Shares for
$1,588 million at a weighted average price of 51.22 per share. The Company’s
previous share repurchase program, initiated in July 2006, allowed for the
repurchase of up to 28.0 million Common Shares between July 25, 2006 and July
24, 2007, pursuant to a normal course issuer bid, at prevailing market prices.
In June 2007, the Company completed this share repurchase program for a total of
$1,453 million, at a weighted-average price of $51.88 per share.
 
 In September 2007,
CN used up the remaining borrowing capacity under its shelf prospectus and
registration statement to issue a US$550 million debt offering composed of
US$250 million (Cdn$250 million) 5.85% Notes due 2017, and US$300 million
(Cdn$300 million) 6.375% Debentures due 2037. CN used the net proceeds of US$
544 million from the offering to repay a portion of its outstanding commercial
paper and to reduce its accounts receivable securitization program. The
indebtedness being repaid was incurred for general corporate purposes, including
for the financing of CN’s share repurchase program.
 
 In December 2007,
CN filed a shelf prospectus with Canadian securities regulators and a
registration statement with the United States Securities and Exchange Commission
(SEC), expiring in January 2010, providing for the issuance by CN of up to
US$2.5 billion of debt securities in Canadian and U.S. markets in one or more
offerings. CN expects to use the net proceeds from the sale of debt securities
under the shelf prospectus and registration statement for general corporate
purposes, including the redemption and refinancing of outstanding indebtedness,
share repurchases, acquisitions, and other business opportunities.
 
 Significant
Cooperation Agreements
  In
2007, CN concluded several cooperation agreements, including the
following:
 
 ●
                  In June 2007,
      CN and Kansas City Southern Railway (“KCS”) concluded a routing protocol
      to streamline the interchange of traffic in a way that reduces both miles
      and handlings.
 
 ●
                  In November
      2007, CN and CP concluded a routing protocol to expedite the exchange of
      interline freight traffic at key gateways in both Canada and the
      U.S.
 
 These two
agreements represent the latest in a series of routing protocol agreements
negotiated by CN that collectively include every Class I North American
railroad.
 
 2007 also saw the
conclusion of additional co-production agreements covering various parts of CN’s
network, including one with Norfolk Southern Railway in March 2007 and one with
Ontario Northland Railway in May 2007. The shared facilities and joint
operations enabled by these agreements help to drive operational efficiencies as
well as asset utilization improvements for each of the participating
carriers.
 
 9
  2006
Highlights
 
 Acquisitions
and Dispositions
 
 In
2006, CN made the following acquisitions for a total cost of $84 million paid in
cash:
 
 In January 2006, CN
completed the purchase of the Alberta short-line railways owned by RailAmerica,
Inc., of Boca Raton, Florida. CN bought the 600-mile Mackenzie Northern Railway
(“MKNR”) and the 118-mile Lakeland & Waterways Railway (“LWR”), both located
north of Edmonton, along with the 21-mile Central Western Railway (“CWR”) in
east-central Alberta that carries agricultural traffic.
 
 In
March 2006, CN acquired the remaining 51% of SLX Canada Inc., a company engaged
in equipment leasing in which the Company previously had a 49% interest that had
been consolidated with its results.
 
 In December 2006,
CN completed the purchase of Savage Alberta Railway, Inc. (“SAR”), a 345-mile
short-line railway, from Savage Companies of Salt Lake City, Utah. The
acquisition represents an opportunity for CN to solidify its freight franchise
in resource-rich northwestern Alberta.
 
 Strategic
Initiatives and Capital Spending
 
 In 2006, CN spent
more than $1.5 billion on capital programs, an increase of eleven per cent over
2005 spending. This included approximately $1 billion spent on infrastructure,
replacing rail, ties, ballast, and other track material and upgrading bridges
and signalling systems, as well as network productivity initiatives and
strategic projects, including siding extensions in western Canada, investments
in the Company's Prince Rupert, British Columbia, corridor, and the
reconfiguration of Johnston Yard in Memphis, Tennessee. Equipment spending of
approximately $350 million in 2006 was for the acquisition of new locomotives,
the rejuvenation of the existing locomotive fleet, the acquisition of new cars
and the refurbishment of the current fleet to meet customer needs. CN also spent
approximately $200 million on facilities, information technology and other
projects to allow the Company to tap new growth opportunities and drive overall
efficiency gains.
 
 Through 2006, CN
continued to take delivery of 75 high-horsepower locomotives ordered in April of
2005, leaving just 15 of the original order for delivery in the latter half of
2007. Also in 2006, the Company exercised its option to acquire an additional 50
high-horsepower locomotives for delivery in the second half of 2007. The 75 new
locomotives of 4,300 – 4,400 horsepower allow CN to replace 100 older 3,000 –
3,600 horsepower road locomotives. These new units are almost 20 per cent more
fuel-efficient than the ones replaced. The additional 50 locomotives will allow
CN to tap growth opportunities, including new international freight traffic to
and from the Port of Prince Rupert intermodal terminal.
  Significant
Cooperation Agreements
 
 In
2006, CN concluded several cooperation agreements, including the following in
January 2006:
 
 •  CN and BNSF Railway
Company (“BNSF”) concluded an agreement covering several key locations where
their respective networks interact including, in particular, the Vancouver,
British Columbia, Chicago, Illinois and Memphis Tennessee to southern Illinois
regions;
 
 •  CN and CP concluded
an agreement intended to make rail operations more fluid in British Columbia’s
Lower Mainland, enhancing service for rail customers and supporting the growth
of Pacific Gateway ports and terminals; and
 
 10
  • CN and CSX
Transportation, Inc., (“CSXT”) concluded a long-term agreement to haul CSXT
traffic to and from Sarnia, Ontario, and CSXT connections in Buffalo, New York,
and Toledo, Ohio.
 
 Financial
Management Initiatives
 
 In May 2006, the
Company filed a shelf prospectus and registration statement, expiring in June
2008, which provided for the issuance, from time to time, of up to US$1,500
million of debt securities in one or more offerings in the Canadian or U.S.
markets for general corporate purposes. Pursuant to the filing, on May 31, 2006,
the Company issued US$250 million (Cdn$275 million) of 5.80% Notes due 2016 and
US$450 million (Cdn$495 million) of 6.20% Debentures due 2036. The Company used
the net proceeds of US$692 million to reduce its accounts receivable
securitization program and to repay a portion of its outstanding commercial
paper.
 
 In May 2006, the
Company entered into an agreement, expiring in May 2011, to sell an undivided
co-ownership interest for maximum cash proceeds of $600 million in a revolving
pool of freight receivables to an unrelated trust. This new program replaced the
Company’s previous accounts receivable securitization program that was set to
expire in June 2006.
  In
July 2006, the interest rate on the Company’s US$250 million Puttable Reset
Securities PURSSM(“PURS”) was
reset at a new rate of 6.71% for the remaining 30-year term ending July 15,
2036. The PURS were originally issued in July 1998 at the rate of 6.45% with an
option to call the securities on July 15, 2006 (the reset date). The call option
holder exercised the call option, which resulted in the remarketing of the
original PURS. The new interest rate was determined according to a pre-set
mechanism based on prevailing market conditions. The Company did not receive any
cash proceeds from the remarketing. The remarketing did not trigger an
extinguishment of debt, as the provisions for the reset of the interest rate
were set forth in the original PURS. As such, the original PURS remain
outstanding but accrue interest at the new rate until July 2036. Under
securities laws, the remarketing required utilization of the Company’s then
current shelf prospectus and registration statement.
 
 As mentioned in the
2007 Highlights, in July 2006, the Board of Directors of the Company approved a
new share repurchase program which allowed for the repurchase of up to 28.0
million Common Shares between July 25, 2006 and July 24, 2007 pursuant to a
normal course issuer bid, at prevailing market prices. In June 2007, the Company
completed this share repurchase program for a total of $1,453 million at a
weighted-average price of $51.88 per share. The Company’s previous share
repurchase program, initiated in 2005, allowed for the repurchase of up to 32.0
million Common Shares between July 25, 2005 and July 24, 2006 pursuant to a
normal course issuer bid, at prevailing market prices. In June 2006, the Company
ended this share repurchase program, having repurchased a total of 30.0 million
Common Shares for $1,388 million at a weighted-average price of $46.26 per
share. Of this amount, 14.0 million Common Shares were repurchased in 2006 for
$717 million (weighted-average price per share of $51.24) and 16.0 million
Common Shares in 2005 for $670 million (weighted-average price per share of
$41.90).
 
 3.2          ANTICIPATEDDEVELOPMENTS
 
 For a discussion of
anticipated developments for 2009, please see the section entitled “Strategy
Overview” on pages 42 to 44 of the Company’s Management’s Discussion and
Analysis for the year ending December 31, 2008 (the “MD&A”), which are
incorporated by reference herein. The MD&A may be found on SEDAR at www.sedar.com.
 
 ITEM
4          DESCRIPTION OF THE
BUSINESS
 
 4.1          OVERVIEW
 
 CN is engaged in
the rail and related transportation business. CN’s network of approximately
21,000 route miles spans Canada and mid-America, from the Atlantic and Pacific
oceans to the Gulf of Mexico, serving the ports of Vancouver, Prince Rupert,
British Columbia, Montreal, Halifax, New Orleans, and Mobile, Alabama, and the
key
 
 11
  metropolitan areas of Toronto, Buffalo, Chicago, Detroit, Duluth,
Minnesota/Superior, Wisconsin, Green Bay, Wisconsin, Minneapolis/St. Paul,
Memphis and Jackson, Mississippi, with connections to all points in North
America. The Company’s freight revenues are derived from seven commodity groups,
representing a diversified and balanced portfolio of goods transported between a
wide range of origins and destinations. In 2008, the largest commodity group
accounted for approximately 19% of revenues. From a geographical standpoint, in
2008, 19% of revenues came from U.S. domestic traffic, 31% from transborder
traffic, 24% from Canadian domestic traffic, and 26% from overseas traffic. For
more information on CN’s commodity groups, including their respective revenues
for the last two years and their principal markets and economic drivers, please
see pages 47 to 52 of the MD&A, which are incorporated by reference
herein.
 
 CN was the
originating carrier for approximately 87% of traffic moving along its network in
2008. This allows the Company both to capitalize on service advantages and to
build on opportunities to efficiently use assets.
 
 4.2          COMMODITYGROUPS
 
 For a description
of the various commodity groups transported by CN, their principal markets, as
well as select revenue, revenue ton mile and carload information, please see
pages 47 to 52 of the MD&A, which are incorporated by reference
herein.
 
 4.3          COMPETITIVECONDITIONS
 
 For a discussion of
the competitive conditions under which CN operates, please see the section
entitled “Competition” in the discussion of Business risks located on pages 80
and 81 of the MD&A, which are incorporated by reference
herein.
  4.4          LABOR
 
 As
at December 31, 2008, CN employed a total of 22,227 employees.
 
 For a discussion of
CN’s labor negotiations, see the section entitled “Labor Negotiations” in the
Business risks discussion located on pages 82 and 83 of the MD&A, which are
incorporated by reference herein.
 
 4.5          SOCIALPOLICIES
 
 In addition to its
Employment Equity Policy (for Canadian employees) and Equal Employment
Opportunity Policy (for U.S. employees), CN maintains a comprehensive Human
Rights Policy and a Harassment Free Environment Policy for its Canadian
employees and a Prohibited Harassment, Discrimination and Anti-Retaliation
Policy for its U.S. employees. These policies affirm CN’s commitment to ensuring
that there is no discrimination against any employee or applicant based on
grounds of religion, race, sex, nationality, disability or any other prohibited
grounds of discrimination. The policy extends to recruitment, selection and
compensation practices, as well as to working conditions and the work
environment. All Company vice-presidents have been mandated with the
responsibility of implementing these policies and ensuring that all work
practices are in compliance. Internal complaint procedures have been established
whereby any person covered by the Harassment Free Environment Policy (for
Canadian employees) and the Equal Employment Opportunity Policy or the
Prohibited Harassment, Discrimination and Anti-Retaliation Policy (for U.S.
employees) can address their questions or concerns to their supervisor and/or
human resources manager who will address their complaints.
 
 12
 
 4.6          REGULATION
 
 The Company’s rail
operations in Canada are subject to (i) economic regulation by the Canadian
Transportation Agency (the “Agency”) under the Canada Transportation Act
(the “CTA”), and (ii) safety regulation by the federal Minister of Transport
under the Railway Safety
Act and certain other statutes. The Company’s U.S. rail operations are
subject to (i) economic regulation by the STB and (ii) safety regulation by the
Federal Railroad Administration (the “FRA”). As such, various Company business
transactions must gain prior regulatory approval, with attendant risks and
uncertainties, and the Company is subject to government oversight with respect
to rate, service and business practice issues. The Company is also subject to a
variety of health, safety, security, labor, environmental and other regulations,
all of which can affect its competitive position and profitability.
 
 The Company’s
ownership of the former Great Lakes Transportation vessels is subject to
regulation by the U.S. Coast Guard and the Department of Transportation,
Maritime Administration, which regulate the ownership and operation of vessels
operating on the Great Lakes and in U.S. coastal waters. While recent
Congressional legislation and Coast Guard rulemakings have not adversely
affected CN’s ownership of these vessels, no assurance can be given that any
future legislative or regulatory initiatives by the U.S. federal government will
not materially adversely affect the Company’s operations or its competitive and
financial position.
 
 With respect to
safety, rail safety regulation in Canada is the responsibility of Transport
Canada, which administers the Canadian Railway Safety Act, as well
as the rail portions of other safety-related statutes. In the U.S., rail safety
regulation is the responsibility of the FRA, which administers the Federal Railroad Safety Act,
as well as the rail portions of other safety statutes. In addition, safety
matters related to security are overseen by the Transportation Security
Administration (“TSA”), which is part of the U.S. Department of Homeland
Security and the Pipeline and Hazardous Materials Safety Administration
(“PHMSA”), which, like the FRA, is part of the U.S. Department of
Transportation.
 
 Canadian
Regulation
 
 The CTA gives
railroads in Canada the freedom to negotiate prices according to market forces,
subject to certain provisions aimed at protecting shippers. These shipper
protections include, inter
alia, interswitching, final offer arbitration and competitive line rates.
Pursuant to interswitching provisions, all shippers within a 30 km radius
(approximately 19 miles) of an interchange between two federally regulated
railroads have access to both at a prescribed interswitching rate. Final offer
arbitration is used in cases of rate disputes between a shipper and a railroad
and involves the selection by an arbitrator of either the shipper’s or the
carrier’s rate and service offer. Competitive line rate provisions can be
invoked to require an originating railroad to issue to a shipper with sole rail
access, a rate covering the movement to the nearest junction with another
railroad according to predetermined formulae.
 
 To supplement
public rates issued under tariffs, the CTA permits confidential contracts to be
negotiated between rail carriers and shippers to govern the terms, conditions
and rates for service. Furthermore, railroads are subject to common carrier
obligations for their services and, in case of breach, shippers may seek redress
from the Agency.
 
 When a railroad
operator wants to sell or abandon lines, the CTA encourages their sale to
short-line operators and provides the framework for line abandonment. The
railroads are required to publish a three-year plan for lines it intends to sell
or discontinue. For discontinuance, the line must be advertised as being for
sale to the public for continued operation and, if no interest is shown, must be
offered specifically for sale to applicable federal, provincial and municipal
governments as well as urban transit authorities. The entire process is intended
to take at most 22 months. The Company’s operations are also subject to safety
and environmental provisions relating to track standards, equipment standards,
transportation of hazardous materials, environmental assessments and certain
labor regulations, which are in many respects similar when comparing Canadian
and U.S. regulations.
 
 13
 Periodically, a
comprehensive review is made by the federal government of the effectiveness of
the CTA, the Canadian Railway
Safety Act and other statutes related to transportation, which may prompt
regulatory amendments as a result. For a further discussion of recent and
pending legislative and other regulatory developments in Canada, see the section
entitled “Regulation” in the Business risks discussion located on pages 83 to 85
of the MD&A, which are incorporated by reference herein.
 
 U.S.
Regulation
 
 The STB has
jurisdiction over, amongst other things, service levels, carrier practices, car
compensation, and limited jurisdiction over carrier rates. It also has
jurisdiction over the situations and terms under which one railroad may gain
access to another railroad’s traffic or facilities, the construction, extension,
or abandonment of rail lines, railroad consolidations, and labor protection
provisions in connection with the foregoing. The STB’s jurisdiction in these
areas of rail transportation, including intrastate rail transportation, is
exclusive, pre-empting other remedies under federal and state law.
 
 The FRA has
jurisdiction over railroad safety and equipment standards, and most rail safety
regulation is handled at the federal level. In contrast, however, to the
exclusive role of the STB over railroad economic regulation, state and local
regulatory agencies have jurisdiction over certain local safety and operating
matters and these agencies are becoming more aggressive in their exercise of
jurisdiction. State legislatures have also recently enacted new laws in this
regard that are intended to regulate railroads more extensively.
 
 Government
regulation of the railroad industry is a significant determinant of the
competitiveness and profitability of railroads. Deregulation of certain rates
and services, plus the ability to enter into confidential contracts, pursuant to
the Staggers Rail Act of
1980 (the “Staggers Act”), has substantially increased the flexibility of
railroads to respond to market forces and has resulted in highly competitive
rates. Various interests have sought and continue to seek reimposition of
government controls on the railroad industry in areas deregulated in whole or in
part by the Staggers Act. Additional regulation, changes in regulation and
re-regulation of the industry through legislative, administrative, judicial or
other action could materially affect the Company.
 
 Following an
extended review, in June 2001, the STB issued new regulations governing mergers
between Class Ι
Railroads. CN had recommended higher public interest standards for mergers and
the new regulations effectively raised the bar for the quality of customer
service in all future major railroad mergers. The STB also agreed with CN that
foreign-headquartered railroads would be treated the same as U.S.-based
railroads under its merger rules.
 
 For a further
discussion of government regulation with respect, in particular, to Canada-U.S.
Customs, U.S. Homeland Security, and the transportation of hazardous material,
as well as recent and pending developments in legislative and regulatory reform
in the U.S., see the section entitled “Regulation” in the Business risks
discussion located at pages 83 to 85 of the MD&A, which are incorporated by
reference herein.
  4.7          ENVIRONMENTALMATTERS
 
 Regulatory
compliance
 
 A risk of
environmental liability is inherent in railroad and related transportation
operations; real estate ownership, operation or control; and other commercial
activities of the Company with respect to both current and past operations. As a
result, the Company may incur significant capital and operating costs associated
with environmental regulatory compliance and clean-up requirements in its
railroad operations and relating to its past and present ownership, operation or
control of real property. Environmental expenditures that relate to current
operations are expensed unless they relate to an improvement to the property.
Expenditures that relate to an existing condition caused by past operations and
which are not expected to contribute to current or future operations are
expensed.
 
 14
 
 In
Canada, the matter of environmental permits for the Company is complex because
of an overlap between federal and provincial jurisdictions. When projects
require approval by federal regulatory authorities, environmental impact
assessments are undertaken in accordance with federal requirements. Provincial
and municipal environmental legislation may be applicable to railway activities
if such legislation does not aim to regulate the management or operations of
railways. Therefore, the Company does not apply systematically for provincial,
municipal or local environmental permits for its railway operations in Canada
except (i) where obtaining and complying with such permits would not interfere
with the operations or management of its railway activities, (ii) where
permitting issues were primarily of a provincial, municipal or local nature,
(iii) where the Company or the governmental authority thought it was necessary
to obtain such permits to continue minor aspects of its railway operations or
maintenance, or (iv) where the absence of a permit may affect a third party
(such as a customer or a supplier). Because of the multiple jurisdictions
involved and the extensive provincial legislative authority to regulate
environmental matters, there can be no assurance that additional provincial,
municipal or local environmental permits will not be required in the future. The
Company may incur additional expenses or changes in its operations if such
additional permits were to be required in the future.
 
 See Note 17 – Major
commitments and contingencies (paragraph D.), to the Company’s 2008 Annual
Consolidated Financial Statements (the “Financial Statements”), for a further
discussion of Environmental Matters, as well as the section entitled
“Environmental Claims”, on pages 73 to 75 of the MD&A, and the section
entitled “Environmental Matters” in the Business risks discussion located on
page 81 of the MD&A, which are incorporated by reference herein. The
Financial Statements and MD&A are available on SEDAR at
www.sedar.com.
 
 Environmental
Policy
 
 CN is committed to
conducting its operations and activities in a manner that protects the natural
environment. CN considers protecting the environment a fundamental corporate
social responsibility governing its activities. Consequently, CN has implemented
comprehensive environmental management programs.
 
 CN
makes the following commitments and expects its employees to act
accordingly:
 
 1.
                  To meet or
      exceed applicable environmental requirements; to measure environmental
      performance; to conduct regular environmental audits and assessments of
      compliance with Company requirements and its Environmental Policy; and to
      timely provide appropriate information to the Board of Directors,
      employees, the authorities, and other
  stakeholders.
 2.
                  To develop,
      design and operate facilities and conduct activities taking into
      consideration the efficient use of energy and materials, the sustainable
      use of renewal resources, the minimization of waste generation and the
      adverse environmental impact, and the safe and responsible disposal of
      residual wastes.
 3.
                  To assess
      environmental impacts before starting a new activity or project and before
      decommissioning a facility.
 4.
                  To develop
      and maintain emergency preparedness plans in conjunction with the
      emergency services, relevant authorities, and the local
      community.
 5.
                  To educate,
      train and motivate employees to conduct their activities in an
      environmentally responsible manner.
 6.
                  To promote
      the adoption of the principles of CN’s Environmental Policy by contractors
      and suppliers.
 7.
                  To conduct or
      support research on the environmental impacts of its operations and on the
      means of minimizing such adverse impacts, and to contribute to the
      transfer of environmentally sound technology throughout the industrial and
      public sector.
 8.
                  To foster
      openness and dialogue with employees and other stakeholders with respect
      to their concerns about potential hazards and impacts of the company’s
      operations.
 9.
                  To
      contribute, along with public and private bodies and organizations to the
      development of policies and programs that will enhance environmental
      awareness and protection based on sound scientific principles and
      procedures.
  15
 
 4.8          LEGALMATTERS
 
 Legal
Proceedings
 
 As of the date
hereof, the only legal proceedings to which CN is a party involving claims for
damages in excess of 10% of its current assets, are described below. It is not
currently expected, however, that such litigation proceedings will have a
material adverse effect on the consolidated financial position or results of
operations of CN. The Company will regularly assess its position as events
progress.
 
 “In
re African-American Slave Descendants Litigation”
 
 This matter is a
slavery reparations case. The plaintiffs, a proposed class representing
descendants of slaves, brought this action seeking payment for work performed by
slaves between 1607 and 1865. The defendants include numerous major
corporations, among them CN, Norfolk Southern Corp., Union Pacific Corporation,
CSX Corporation, Fleet Boston Financial Corp., Aetna Inc., Brown and Williamson
Tobacco, Lehman Bros. Inc., Ligget Group Inc., New York Life Insurance Company,
R.J. Reynolds Tobacco Company, Society of Lloyds, Loews Inc. and JP Morgan Chase
& Co. The amount claimed would be in the trillions of dollars, some part of
which would be claimed from IC, a subsidiary of CN. The Company is contesting
these proceedings.
 
 CN
was first named as a defendant in slavery reparations litigation in a complaint
filed on September 4, 2002 in Louisiana.
  The Louisiana
complaint was consolidated in multi-district litigation proceedings in the U.S.
District Court for the Northern District of Illinois in Chicago, Illinois.
Plaintiffs also filed cases in California, Texas, Illinois, New Jersey and New
York. CN is named as a defendant in the Louisiana and California
actions.
 
 In 2005, the United
States District Court dismissed the proceedings with prejudice, ruling that only
the legislative or executive branches of government could decide reparations
issues. The U.S. Court of Appeals for the Seventh Circuit modified that
dismissal for most of the plaintiffs to a dismissal without prejudice, due to
their lack of standing to bring a claim in federal court. For those plaintiffs
suing as the legal representatives of the estates of slaves, their claims were
dismissed with prejudice due to the expiration of the statute of limitations.
The claims of plaintiffs who alleged violations of state consumer fraud or
consumer protection statutes were remanded to the District Court for further
proceedings.
 
 Sydney
Tar Ponds Lawsuit
 
 A lawsuit involving
more than 350 plaintiffs was instituted on March 25, 2004 in the Supreme Court
of Nova Scotia against Hawker Siddeley Canada Inc., Sydney Steel Corp., the Nova
Scotia government, the Canadian government, Domtar Inc., and CN. The plaintiffs
are seeking compensation for health problems and property losses due to soil and
water contamination resulting from previous industrial activities near Sydney,
Nova Scotia.
 
 The plaintiffs seek
to hold the defendants liable for battery, nuisance, trespassing, negligence,
harm and injuries, family losses, as well as aggravated, punitive and additional
damages. No specific amount of damages is included in the claim.
 
 The court action is
still in the process of being certified as a class action. CN is contesting
these proceedings. To date, none of the allegations contained in the claim have
been proven in court.
  See See Note 17 –
Major commitments and contingencies (paragraph C) to the Financial Statements,
for a further discussion of legal actions, as well as pages 72 and 73 of
the MD&A for a general discussion of personal injury and other
claims.
  16
 
 Aboriginal Claims
 
 CN and its
predecessor companies have acquired lands throughout Canada from the Crown,
including certain lands contained in aboriginal reserves. A portion of the
Company’s network, primarily in British Columbia, is currently operated on these
lands.
 
 The Company
believes that it possesses unrestricted and absolute title to lands acquired out
of aboriginal reserves but, in recent years, some aboriginal bands have claimed
to have a continuing legal interest in such lands and they allege this interest
prohibits the Company from disposing of the lands when they are no longer needed
for railway purposes, except by allowing them to revert to the Crown for the
benefit of aboriginals. This issue is one which will ultimately be decided by
the courts but, regardless of the outcome, there is no perceived material
adverse effect as the right of the Company to continue to occupy and operate
over such lands is not being called into question.
 
 As the issues
surrounding aboriginal claims are complex and involve not only private interests
but fiduciary and other obligations of the Government of Canada, CN has agreed
with the Government not to sell or otherwise dispose of land which is not
essential to its rail operations and which is located in, or adjacent to, an
aboriginal reserve, unless each of CN and the Government are satisfied that
there is no legitimate aboriginal claim with respect to such land. In addition,
CN has agreed to convey to the Government, for no consideration, any land not
integral to its rail operations which may be necessary to settle legitimate
aboriginal claims with respect to such land, or lands which were formerly
reserve lands and which have become non-rail assets. The Government of Canada,
for its part, has agreed that it will provide the necessary compensation for
settlement of legitimate aboriginal claims which would otherwise result in CN
having to relinquish land essential to its rail network, unless such claims
arise out of, or are substantially based upon, willful, known, negligent or
fraudulent acts or omissions of CN which adversely affected the rights or
interests of aboriginal people.
  4.9          RISKFACTORS
 
 A description of
risks affecting CN and its business appears under the heading “Business risks”
located on pages 80 to 88 of the MD&A, which pages are incorporated by
reference herein. See Section 1 of this AIF for a further discussion of risks
associated with forward-looking statements.
 
 ITEM
5          DIVIDENDS
 
 The Company has
declared dividends in line with its overall financial performance and cash flow
generation. The Board of Directors makes decisions on dividend payout on a
quarterly basis. Consistent with this practice, the quarterly rate of $0.1625
per share, starting with the first quarter of 2006, was increased to $0.21 per
share, starting with the first quarter of 2007; the quarterly dividend was next
increased to $0.23 per share, starting with the first quarter of 2008 and to
$0.2525 per share, starting with the first quarter of 2009. There can be no
assurance as to the amount or timing of such dividends in the
future.
 
 ITEM
6          DESCRIPTION OF
CAPITAL STRUCTURE
 
 6.1          GENERALDESCRIPTION
OFCAPITALSTRUCTURE
 
 The authorized
share capital of CN consists of an unlimited number of Common Shares, an
unlimited number of Class A Preferred Shares issuable in series and an unlimited
number of Class B Preferred Shares issuable in series, all without par
value.
 
 17
 Common Shares
 
 The Common Shares
carry and are subject to the following rights, privileges, restrictions and
conditions described below:
 
 Voting:Each common share
entitles its holder to receive notice of and to attend all general and special
meetingsof
shareholders of CN, other than meetings at which only the holders of a
particular class or series of shares are entitled to vote, and each such common
share entitles its holder to one vote.
 
 Dividends:The holders of
Common Shares are, at the discretion of the Directors, entitled to receive, out
of anyamounts
properly applicable to the payment of dividend, and after the payment of any
dividends payable on any Preferred Shares, any dividends declared and payable by
CN on the Common Shares.
 
 Dissolution: The holders of
Common Shares shall be entitled to share equally in any distribution of the
assets ofCN upon
the liquidation, dissolution or winding-up of CN or other distribution of its
assets among its shareholders. Such participation is subject to the rights,
privileges, restrictions and conditions attaching to any issued and outstanding
Preferred Shares or shares of any other class ranking prior to the Common
Shares.
 
 Preferred
Shares
 
 The Class A
Preferred Shares and the Class B Preferred Shares are issuable in series and,
subject to CN’s Articles, the Board of Directors is authorized to fix, before
issuance, the designation, rights, privileges, restrictions and conditions
attaching to the shares of each series. The holders of Class A Preferred Shares
or Class B Preferred Shares shall not be entitled to vote at meetings of
shareholders otherwise than as provided by law, and holders of Class A or Class
B Preferred Shares shall not be entitled to vote separately as a class except as
provided by law.
 
 There are neither
any Class A Preferred Shares nor any Class B Preferred Shares currently issued
and outstanding.
 
 6.2          SHAREOWNERSHIPCONSTRAINTS
 
 CN’s Articles
provide that where the total number of voting shares held, beneficially owned,
or controlled, directly or indirectly, by any one person together with his or
her associates exceeds 15%, no person shall exercise the voting rights attached
to the voting shares held, beneficially owned or controlled, directly or
indirectly, by such person or his or her associates. Furthermore, all dividends
attributable to the percentage of voting shares held by such persons in excess
of 15% shall be forfeited, including any cumulative dividend. CN’s Articles
confer on the Board of Directors all powers necessary to give effect to the
ownership restrictions, including the ability to pay dividends or to make other
distributions which would otherwise be prohibited if the event giving rise to
the prohibition was inadvertent or of a technical nature or it would otherwise
be inequitable not to pay the dividends or make the distribution. CN’s Articles
provide that the Board of Directors may adopt by-laws concerning the
administration of the constrained share provisions described above, including
by-laws requiring a shareholder to furnish a declaration indicating whether he
or she is the beneficial owner of the shares and whether he or she is an
associate of any other shareholder. In addition, CN is also authorized to refuse
to recognize the ownership rights that would otherwise be attached to any voting
shares held, beneficially owned or controlled, directly or indirectly, contrary
to the share ownership constraint. Finally, CN has the right, for the purpose of
enforcing any constraint imposed pursuant to its Articles, to sell, as if it
were the owner thereof, any voting shares that are owned or that the Directors
determine may be owned, by any person or persons contrary to such share
ownership constraint.
 
 18
 
 6.3           RATINGS
OFDEBTSECURITIES
 
 Various classes of
CN’s outstanding securities have been rated by several rating organizations as
described in detail below, as of the date hereof.
 
 Dominion
      Bond
                  Moody’s
                  Standard
      &Rating
      Service
                  Investors
      Service
                  Poor’sLong-Term
      Debt
                  A
      (low)
                  A3
                  A-Commercial
      Paper
                  R-1
      (low)
                  Not
      rated
                  A-2
 
 The above-noted
ratings are given the following credit characteristics by the various rating
agencies:
 
 Dominion
Bond Rating Service Limited (“DBRS”)
 
 ●
                  Long-term
      debt rated A is of satisfactory credit quality. Protection of interest and
      principal is still substantial, but the degree of strength is less than AA
      rated securities. While “A” is a respectable rating, entities in this
      category are considered to be more susceptible to adverse economic
      conditions and have greater cyclical tendencies than higher-rated
      securities. This rating falls within the third highest of DBRS’s ten
      long-term debt rating categories which range from “AAA” to “D”. Reference
      to “low” denotes a standing in the lower end of a rating
      category.
 
 ●
                  Commercial
      paper rated R-1 (low) is of satisfactory credit quality. The overall
      strength and outlook for key liquidity, debt, and profitability ratios is
      not normally as favourable as with higher rating categories, but these
      considerations are still respectable. Any qualifying negative factors that
      exist are considered manageable, and the entity is normally of sufficient
      size to have some influence in its industry. This rating falls within the
      third highest of DBRS’s ten short-term debt rating categories which range
      from “R-1 (high)” to “D”.
 
 Moody’s
Investors Service (“Moody’s”)
 
 ●
                  Long-term
      debt obligations rated A are considered upper-medium grade and are subject
      to low credit risk. This rating falls within the third highest of Moody’s
      nine generic long-term obligation rating categories which range from “Aaa”
      to “C”. The modifier “3” indicates a ranking in the lower end of that
      generic rating category.
 
 Standard
& Poor’s (“S&P”)
 
 ●
                  Long-term
      debt obligations rated A are somewhat more susceptible to the adverse
      effects of changes in circumstances and economic conditions than
      obligations in higher rated categories. The obligor’s capacity to meet its
      financial commitment on the obligations is, however, still strong. This
      rating falls within the third highest of S&P’s ten major long-term
      credit rating categories which range from “AAA” to “D”. The minus (-) sign
      indicates a standing in the lower end within a major
    category.
 
 ●
                  Commercial
      paper rated A-2 is somewhat more susceptible to the adverse effects of
      changes in circumstances and economic conditions than obligations in
      higher rating categories. However, the obligor’s capacity to meet its
      financial commitment on the obligation is satisfactory. This rating falls
      within the second highest in S&P’s eight short-term credit rating
      categories which range form “A-1” to
“D”.
 
 The ratings of CN’s
securities described above should not be construed as a recommendation to buy,
sell, or hold CN securities. Ratings may be revised or withdrawn at any time by
the rating agencies.
 
 19
  ITEM
7          TRANSFER AGENT AND
REGISTRAR
 
 In Canada, the
transfer agent and registrar for each class of CN’s publicly issued securities
is Computershare Trust Company of Canada and, in the United States, the
co-transfer agent and co-registrar is Computershare Trust Company, N.A., both of
which maintain registers of transfers for those securities at the locations
specified below:
 
 Computershare Trust
Company of Canada
 100
University Ave., 9thFloor
 Toronto, Ontario
M5J 2Y1
 Toll Free Tel:
1-800-564-6253
 Toll Free Fax:
1-888-453-0330
 Email: service@computershare.com
 Web: www.computershare.com
 
 Co-transfer
agent and co-registrar:
 
 Computershare Trust
Company, N.A.
 350 Indiana St
Suite 800
 Golden, Colorado
80401
 Telephone: (303)
262-0600
 
 ITEM
8          MARKET FOR
SECURITIES
 
 8.1           TRADINGPRICE
ANDVOLUME
 
 CN’s Common Shares
are listed on both the TSX and the NYSE under the stock symbols CNR and CNI,
respectively. The following table sets forth the price ranges and aggregate
trading volumes of the Common Shares on the TSX for each month of
2008.
 
 MONTH
                  HIGH
                  LOW
                  VOLUMEJanuary
                  51.06
                  42.51
                  42,281,595February
                  54.25
                  49.58
                  28,084,952March
                  53.44
                  46.60
                  32,676,301April
                  54.62
                  48.80
                  27,687,769May
                  57.48
                  52.15
                  30,684,205June
                  55.71
                  48.16
                  34,597,697July
                  55.35
                  45.42
                  35,951,147August
                  57.29
                  50.90
                  29,578,572September
                  58.44
                  49.00
                  50,649,735October
                  54.04
                  42.51
                  49,474,258November
                  54.00
                  39.24
                  31,074,168December
                  45.75
                  39.75
                  28,398,498
  8.2PRIOR SALES
 
 In
May 2008, CN, under its shelf prospectus and registration statement filed in
December 2007, issued a US$650 million debt offering composed of US$325 million
4.95% Notes due in 2014 and US$325 million 5.55% Notes due in 2018, which is
detailed in the following table.
 
 20
 
 Security
                  Notes
      due 2014
                  Notes
      due 2018Size of
      Offering:
                  US$325,000,000
                  US$325,000,000Maturity
      Date:
                  January 15,
      2014
                  May 15,
      2018Coupon
      Rates:
                  4.95%
                  5.55%Net Proceeds
      of Issue:
                  US$321,655,750
                  US$321,470,500Public
      Offering Price:
                  99.571% per
      note
                  99.564% per
      noteApplication
      of Proceeds:
                  Repay a
      portion of outstanding commercial paper and reduce
  accountsreceivable
      securitization program.
 
 In
the ordinary course of business, the Company also issued commercial paper with
maturities of less than 12 months of which a total of CDN$ 256.2 million and US$
303.5 million was outstanding as at December 31, 2008.
  ITEM
9          DIRECTORS AND
EXECUTIVE OFFICERS
 
 9.1          DIRECTORS
 
 The Directors are
elected by the Shareholders at the Annual General Meeting, and hold office until
their term expires at the following Annual General Meeting, subject to
resignation, retirement, or re-election. The following table lists the Directors
of the Company as of the date hereof:
 
 Name and Province or State of
                  Date of First Election
                  Principal Occupations
      within the PrecedingResidence
                  to
      Board
                  Five
      YearsMichael R.
      Armellino, CFA
                  May 7,
      1996
                  Retired
      Partner, The Goldman Sachs Group, LPNew Jersey,
      U.S.A.
                  
                  (investment
      bank)A. Charles
      Baillie, O.C., LL.D.
                  April 15,
      2003
                  Retired
      Chairman and Chief Executive Officer,Ontario,
      Canada
                  
                  The
      Toronto-Dominion Bank (bank)Hugh J.
      Bolton, FCA
                  April 15,
      2003
                  Chairman,
      Epcor Utilities Inc. (energy and energy-Alberta,
      Canada
                  
                  related
      services provider)Ambassador
      Gordon D. Giffin
                  May 1,
      2001
                  Senior
      Partner, McKenna Long & Aldridge (lawGeorgia,
      U.S.A.
                  
                  firm)James K.
      Gray, O.C., A.O.E., LL.D.,
                  July 4,
      1996
                  Corporate
      Director and Former Chairman andAlberta,
      Canada
                  
                  Chief
      Executive Officer, Canadian HunterExploration
      Ltd. (natural gas company)E. Hunter
      Harrison
                  December 7,
      1999
                  President and
      Chief Executive Officer, CN;Florida,
      U.S.A.Edith E.
      Holiday
                  June 1,
      2001
                  Corporate
      Director and Trustee,  and formerDistrict of
      Columbia, U.S.A.
                  
                  General
      Counsel, United States TreasuryDepartment
      and Secretary of Cabinet,The White
      House
 
 21
  Name and Province or State of
                    Date of First Election
                    Principal Occupations
      within the PrecedingResidence
                    to
      Board
                    Five
      YearsV.  Maureen  Kempston  Darkes,  O.C.,
                      D. Comm.
      LL.D.
                        Florida,
      U.S.A.
                    March 29,
      1995
                    Group
      Vice-President and President Latin America, Africa and Middle East,
      General Motors Corporation (automotive
      manufacturer)Robert H.
      Lee,  C.M., O.B.C., LL.D.
                      British
      Columbia, Canada
                    April 21,
      2006
                    Chairman,
      Prospero Group of Companies (real estate investment, financing, sales and
      property management group of companies)Denis Losier,
      LL.D.
                      New
      Brunswick, Canada
                    October 25,
      1994
                    President and
      Chief Executive Officer, Assumption Life (life insurance
      company)The  Hon.  Edward  C.  Lumley,  P.C.,
                      LL.D.
                        Ontario,
      Canada
                    July 4,
      1996
                    Vice-Chairman,
      BMO Capital Markets (investment bank)David G.A.
      McLean, O.B.C., LL.D.,
                      British
      Columbia, Canada
                    August 31,
      1994
                    Chair and
      Chief Executive Officer, The McLean Group (real estate investment, film
      and television facilities, communications and helicopter
      charters)Robert
      Pace
                      Nova Scotia,
      Canada
                    October 25,
      1994
                    President and
      Chief Executive Officer, The Pace Group (private holding
      company)
 Committee
Membership
  The membership of
each Board committee is composed of the following Directors:
 
 Audit
Committee
 
 Michael R.
Armellino, A. Charles Baillie, Hugh J. Bolton, Robert H. Lee, Denis Losier
(chair), Robert Pace.
 
 Corporate
Governance and Nominating Committee
 
 Hugh J. Bolton,
James K. Gray, Edith E. Holiday, Denis Losier, David G. A. McLean (chair),
Robert Pace.
 
 Environment,
Safety and Security Committee
 
 Ambassador Gordon
D. Giffin, James K. Gray, Edith E. Holiday, V. Maureen Kempston Darkes (chair),
The Hon. Edward C. Lumley, David G. A. McLean.
 
 Finance
Committee
 
 Michael R.
Armellino, A. Charles Baillie (chair), Ambassador Gordon D. Giffin, V. Maureen
Kempston Darkes, Robert H. Lee, The Hon. Edward C. Lumley.
 
 Human
Resources and Compensation Committee
 
 A.
Charles Baillie, Hugh J. Bolton, Ambassador Gordon D. Giffin, James K. Gray,
Edith E.  Holiday, The Hon. Edward
  22
 
 C.
Lumley, David G. A. McLean, Robert Pace (chair).
 
 Investment
Committee of CN’s Pension Trust Funds
 
 Michael R.
Armellino, James K. Gray, Edith E. Holiday, V. Maureen Kempston Darkes, Robert
H. Lee, Denis Losier, The Hon. Edward C. Lumley (chair), David G. A. McLean,
Robert Pace.
 
 Strategic
Planning Committee
 
 Michael R.
Armellino (chair), A. Charles Baillie, Hugh J. Bolton, Ambassador Gordon D.
Giffin, James K. Gray, E. Hunter Harrison, Edith E. Holiday, V. Maureen Kempston
Darkes, Robert H. Lee, Denis Losier, The Hon. Edward C. Lumley, David G. A.
McLean, Robert Pace.
 
 9.2          AUDITCOMMITTEEDISCLOSURE
 
 Composition
of the Audit Committee
 
 The Audit Committee
is composed of six “independent” directors, namely, Denis Losier, chair of the
Committee, Michael R. Armellino, A. Charles Baillie, Hugh J. Bolton, Robert H.
Lee and Robert Pace.
 
 Education
and Relevant Experience of the Audit Committee Members
 
 The board of
Directors believes that the composition of the Audit Committee reflects a high
level of financial literacy and experience. Each member of the committee has
been determined by the board to be financially literate, as such term is defined
under Canadian and United States securities laws and regulations and the New
York Stock Exchange Corporate Governance Standards. The board has made such
determination based on the education and experience of each committee member.
The following is a description of the education and experience of each member of
the Audit Committee that is relevant to the performance of his responsibilities
as a member of the committee:
 
 Mr. Losier is
President and Chief Executive Officer, Assumption Life. Mr. Losier held various
cabinet level positions with the government of the Province of New Brunswick,
from 1989 to 1994. He is a director and member of the audit committee of
Plazacorp Retail Properties Ltd., and he is also a director of Enbridge Gas New
Brunswick Limited Partnership and NAV CANADA. Mr. Losier holds a Masters of
Economics from the University of Western Ontario.
 
 Mr. Armellino is a
Retired Partner, The Goldman Sachs Group, LP. From 1991 to 1994, Mr. Armellino
was chair and Chief Executive Officer of Goldman Sachs Asset Management. Prior
to 1991, he had held various positions at Goldman, Sachs & Co., including
those of senior transportation analyst and Partner in Charge of Research. He is
a Chartered Financial Analyst. Mr. Armellino holds an MBA in finance from the
Stern School of Business (New York University), New York and has more than 25
years of experience as a securities analyst.
 
 Mr. Baillie retired
as chair of The Toronto-Dominion Bank in April 2003, and as Chief Executive
Officer of the bank in December 2002. Mr. Baillie is a director and member of
the audit committee of Telus Corporation. He is also a director and chair of the
audit committee of George Weston Limited. Mr. Baillie holds an MBA from Harvard
Business School.
  Mr. Bolton is the
Chairman of the board of directors of EPCOR Utilities Inc. and Matrikon Inc. Mr.
Bolton is a director and chair of the audit committees of Teck Cominco Limited,
the Toronto-Dominion Bank and WestJet Airlines Ltd. From 1992 to 1998, Mr.
Bolton was chair and Chief Executive Partner of Coopers & Lybrand Canada
(now PricewaterhouseCoopers). Mr. Bolton was a partner of Coopers & Lybrand
for 34 years and a public accountant and auditor with that firm for 40 years. He
is a fellow of the Alberta Institute of Chartered Accountants. He holds an
undergraduate degree in economics from the University of Alberta. Mr. Bolton is
a member of four audit committees
 
 23
 of public companies
including CN. The Board has determined that such service in no way impaired Mr.
Bolton’s ability to effectively serve on the Audit Committee of the
Company.
 
 Mr. Lee is Chairman
of the Prospero Group of Companies, which includes real estate investment,
financing, sales and property management businesses. He is a director and member
of the audit committee of Wall Financial Corporation and he is chairman of UBC
Properties Trust. Mr. Lee holds a Bachelor of Commerce degree from the
University of British Columbia.
 
 Mr. Pace is the
President and Chief Executive Officer, The Pace Group. Mr. Pace is also a member
of the board of directors of Maritime Broadcasting Systems Limited, High Liner
Foods Incorporated, Hydro One and is board chair of Overland Realty Limited. Mr.
Pace holds an MBA and an LL.B Law Degree from Dalhousie University in Halifax,
Nova Scotia, and has more than 20 years of business experience.
 
 Auditors’
Fees
 
 KPMG LLP has served
as the Company’s auditors since 1992. For the years ended December 31, 2008 and
2007, the fees for audit, audit related, tax and other services provided to the
Company by KPMG LLP were the following:
 
 Fees
                  2008(1)
                  2007(1)Audit
                  $2,794,000
                  $3,170,000Audit
      Related
                  $1,170,000
                  $1,371,000Tax
                  $797,000
                  $603,000Other
                  ——
                  ——Total
      Fees
                  $4,761,000
                  $5,144,000(1)Fees rounded
      to the nearest thousand.
 
 Pursuant to the
terms of its charter, the Audit Committee approves all audit and audit-related
services, audit engagement fees and terms and all non-audit engagements with the
independent auditor. The Audit Committee pre-approved all the services performed
by CN’s independent auditors for audit-related and non-audit related services
for the years ended December 31, 2008 and 2007 that were required to be
pre-approved.
 
 A
discussion of the nature of the services under each category is described
below.
 
 Audit
fees
 
 Consists of fees
incurred for professional services rendered by the auditors in relation to the
audit of the Company’s consolidated annual financial statements and those of its
subsidiaries and the audit relating to the Company’s internal control over
financial reporting.
 
 Audit-related
fees
 
 Audit-related fees
were incurred for professional services rendered by the auditors in relation to
the audit of the financial statements for the Company’s pension plans, and for
attestation services in connection with reports required by statute or
regulation and due diligence and other services, including comfort letters, in
connection with the issuance of securities.
 
 24
 
 Tax fees
 
 Consists of fees
incurred for consultations on cross-border tax implications for employees and
tax compliance.
 
 Other
fees
 
 Nil
 
 The mandate of the
Audit Committee, attached as Schedule A to this AIF, provides that the Audit
Committee determines which non-audit services the external auditors are
prohibited from providing, approves audit services and pre-approves permitted
non-audit services to be provided by the external auditors. CN’s Audit Committee
and the Board of Directors have adopted resolutions prohibiting the Company from
engaging KPMG LLP to provide certain non-audit services to the Company and its
subsidiaries, including bookkeeping or other services related to the accounting
records or financial statements, financial information systems design and
implementation, appraisal or valuation services, fairness opinions, or
contribution in-kind reports, actuarial services, internal audit outsourcing
services, management functions or human resources functions, broker or dealer,
investment adviser, or investment banking services and legal services and expert
services unrelated to the audit. Pursuant to such resolutions, the Company may
engage KPMG LLP to provide non-audit services, including tax services, other
than the prohibited services listed above, but only if the services have
specifically been pre-approved by the Audit Committee.
 
 9.3          EXECUTIVEOFFICERS
 
 As
of the date hereof, the following are the senior executive officers of the
Company:
 
 Name and Province or
                  Position
                  Principal Occupations
      withinState of
      Residence
                  
                  the
      Preceding Five YearsE. Hunter
      Harrison
                  President and
      Chief Executive
                  President and
      Chief Executive Officer;Florida,
      U.S.A.
                  OfficerRussell
      Hiscock
                  President and
      Chief Executive
                  President and Chief  Executive  Officer,  CNQuebec,
      Canada
                  Officer,
                  Investment
      Division;
      General
      Manager;CN Investment
      Division
                  Manager Common Stocks (Canada),
      CNInvestment
      Division;Mike
      Cory
                  Senior
      Vice-President,
                  Senior
      Vice-President, Eastern Region; Vice-Ontario,
      Canada
                  Eastern
      Region
                  President,
      Operations, Eastern Region; Vice-President,
      Operations, Western Region;Assistant
      Vice-President, Network Operations;General
      Manager, Operations, Michigan SubRegion;
      Network Operations Superintendent;Director,
      Service Design;Keith E.
      Creel
                  Executive
      Vice-President,
                  Executive
      Vice-President, Operations; SeniorIllinois,
      U.S.A.
                  Operations
                  Vice-President,
      Eastern Region;Sameh
      Fahmy
                  Senior
      Vice-President,
                  Senior
      Vice-President,Quebec,
      Canada
                  Engineering,
      Mechanical and
                  Engineering,Mechanical
      and SupplySupply
      Management
                  Management
 
 25
 
 Name and Province or
                    Position
                    Principal Occupations
      withinState of
      Residence
                    
                    the
      Preceding Five YearsSean Finn
                    Executive
      Vice-President,
                    Executive
      Vice-President, Corporate ServicesQuebec,
      Canada
                    Corporate
      Services and
                    and Chief
      Legal Officer; Senior Vice-PresidentChief Legal
      Officer
                    Public
      Affairs, Chief Legal Officer and Corporate Secretary;James M.
      Foote
                    Executive
      Vice-President,
                    Executive
      Vice-President, Sales andIllinois,
      U.S.A.
                    Sales and
      Marketing
                    Marketing;Stan
      Jablonski
                    Senior
      Vice-President,
                    Senior  Vice-President,  Sales;  Vice-President,Quebec,
      Canada
                    Sales
                    Sales;Claude
      Mongeau
                    Executive
      Vice-President and
                    Executive
      Vice-President and Chief FinancialQuebec,
      Canada
                    Chief
      Financial Officer
                    OfficerJean-Jacques
      Ruest
                    Senior
      Vice-President,
                    Senior
      Vice-President, Marketing;Quebec,
      Canada
                    Marketing
                    Vice-President,
      Marketing;Gordon T.
      Trafton
                    Senior
      Vice-President,
                    Senior
      Vice-President, Southern Region;Illinois,
      U.S.A.
                    Southern
      RegionJim
      Vena,
                    Senior
      Vice-President,
                    Senior Vice-President, Western Region;Alberta,
      Canada
                    Western
      Region
                    Senior Vice-President, Eastern Region; Vice-President,Operations;Vice-President,Champlain
      District; General Manager, Prairie.
 The senior
executive officers are appointed by the Board of Directors and hold office until
their successors are appointed subject to resignation, retirement or removal by
the Board of Directors.
  As at February 4,
2009, the Directors and the members of the executive committee, including the
senior executive officers mentioned above, of the Company, as a group,
beneficially owned, directly or indirectly, or exercised control or direction
over, or held options to exercise an aggregate of approximately 10.3 million
Common Shares of the Company, representing approximately 2.2% of the outstanding
Common Shares.
  9.4          CEASETRADEORDERS,
BANKRUPTCIES,
PENALTIES
ORSANCTIONS
  To the knowledge of
the Company and based upon information provided to it by the Company’s Directors
and executive officers, none of such Directors or executive officers is or has
been, in the last 10 years, a director or executive officer of any company that,
while such person was acting in that capacity: (a) was the subject of a cease
trade or similar order or an order that denied the relevant company access to
any exemption under securities legislation, for a period of more than 30
consecutive days; (b) was subject to an event that resulted, after that person
ceased to be a director or executive officer, in the company being the subject
of a cease trade or similar order or an order that denied the relevant company
access to any exemption under securities legislation, for a period of more than
30 consecutive days; or (c) within a year of that person ceasing to act in that
capacity, became bankrupt, made a proposal under any legislation relating to
bankruptcy or insolvency or was subject to or instituted any proceedings,
arrangement or compromise with creditors or had a receiver, receiver manager or
trustee appointed to hold its assets, except for the following:
  (i)
                  Mr. Baillie,
      a Director of the Company, was a director of Dana Corporation, which filed
      voluntary petitions
for
 
 26
 
 reorganization under Chapter 11 of the U.S. Bankruptcy Code on March
3, 2006. Dana’s European, South American, Asian-Pacific, Canadian and Mexican
subsidiaries are not included in the Chapter 11 filing. Dana Corporation
successfully emerged from Chapter 11 reorganization in February 2008. Mr.
Baillie is no longer a director of Dana Corporation;
 
 (ii)
                  Mr. Lumley, a
      Director of the Company, was a director of Air Canada when it voluntarily
      filed for protection under the Companies’ Creditors
      Arrangement Act (“CCAA”) in April 2003. Air Canada successfully
      emerged from the CCAA proceedings and was restructured pursuant to a plan
      of arrangement in September 2004. Mr. Lumley is no longer a director of
      Air Canada; and
 
 (iii)
                  Mr. Claude
      Mongeau, the Executive Vice-President and Chief Financial Officer of the
      Company, was acting as a director of 360networks Corporation prior to the
      latter voluntarily filing for protection under the CCAA in June 2001.
      360networks Corporation underwent restructuring in 2002 and sold its
      Canadian assets to Bell Canada in November 2004. Mr. Mongeau is no longer
      a director of 360networks Corporation. Mr. Mongeau is also a director of
      Nortel Networks Corporation, which voluntarily filed for protection under
      the CCAA in Canada as well as voluntary petitions under Chapter 11 of the
      U.S. Bankruptcy Code on January 14,
2009.
 
 ITEM
10          INTEREST OF
EXPERTS
 
 KPMG LLP is the
external auditor who prepared the Report of Independent Registered Public
Accounting Firm to the Board of Directors and Shareholders of CN relating to the
effectiveness of internal controls over financial reporting and relating to the
audit of the 2008 annual consolidated financial statements and notes thereto
prepared under U.S. generally accepted accounting principles. We are advised
that, as at the date hereof, the members of KPMG are independent in accordance
with the Rules of the Code of Ethics of the Ordre des comptables agréés du
Quebec.
 
 ITEM
11          ADDITIONAL
INFORMATION
 
 Additional
information regarding CN can be found on SEDAR at www.sedar.com.
Additional financial information is provided in CN’s Annual Consolidated
Financial Statements and Management’s Discussion & Analysis for its most
recently completed financial year. Additional information, including Directors’
and officers’ remuneration and securities authorized for issuance under equity
compensation plans, is contained in the Company’s Information Circular prepared
in respect of its annual meeting of shareholders to be held on April 21, 2009
(the “Circular”). The Circular will become available on SEDAR at www.sedar.com
on or about March 23, 2009.
 
 27
 
 SCHEDULE
A
 
 CHARTER OF THE
AUDIT COMMITTEE
   1.
                    Membership
      and Quorum
 
 ●
                    a minimum of
      five Directors appointed by the
Board;
 
 ●
                    only
      Independent (as determined by the Board) Directors may be appointed. A
      member of the Audit Committee may not, other than in his or her capacity
      as a Director or member of a board committee and subject to the exceptions
      provided in Canadian and U.S. laws and regulations, accept directly or
      indirectly any fee from CN or any subsidiary of CN nor be an affiliated
      person of CN or any subsidiary of
CN;
  ●
                      each member
      must be “financially literate” (as determined by the
    Board);
  ●
                        at least one
      member must be an “audit committee financial expert” (as determined by the
      Board);
  ●
                          quorum of
      majority of members.
  2.
                              Frequency and
      Timing of Meetings
 ●
                                  normally one
      day prior to CN board meetings;
 ●
                                      at least five
      times a year and as necessary;
 ●
                                          committee
      members meet before or after every meeting without the presence of
      management.
 3.
                                                Mandate
 The
responsibilities of the Audit Committee include the
following:
 
 A.
                    Overseeing
      financial reporting
  ●
                        monitoring
      the quality and integrity of CN’s accounting and financial reporting
      process through discussions with management, the external auditors and the
      internal auditors;
 ●
                              reviewing
      with management and the external auditors, the annual audited financial
      statements to be included in the annual report of CN, including CN’s
      MD&A disclosure and earnings press releases prior to their release,
      filing and distribution;
 ●
                                    reviewing
      with management and the external auditors, quarterly consolidated
      financial statements of CN and accompanying information, including CN’s
      MD&A disclosure and earnings press releases prior to their release,
      filing and distribution, and reviewing the level and type of financial
      information provided, from time to time, to financial
    markets;
 ●
                                          reviewing the
      financial information contained in the annual information form and other
      reports or documents, financial or otherwise, requiring Board
      approval;
 ●
                                                reviewing the
      procedures in place for the review of CN’s disclosure of financial
      information extracted or derived from CN’s financial statements and
      periodically assessing the adequacy of those
  procedures;
 ●
                                                      reviewing
      with the external auditors and management, the quality, appropriateness
      and disclosure of CN’s accounting principles and policies, underlying
      assumptions and reporting practices, and any proposed changes
      thereto;
 28
  ●
                        reviewing
      any analysis or other written communications prepared by management, the
      internal auditors or external auditors setting forth significant financial
      reporting issues and judgments made in connection with the preparation of
      the financial statements, including analyses of the effect of alternative
      generally accepted accounting principles
    methods;
 ●
                                reviewing the
      external auditors’ report on the consolidated financial statements of CN
      and on the financial statements of CN’s Pension Trust
    Funds;
 ●
                                        reviewing the
      external auditors’ quarterly review engagement
  report;
 ●
                                                reviewing the
      compliance of management certification of financial reports with
      applicable legislation;
 ●
                                                        reviewing any
      litigation, claim or other contingency and any regulatory or accounting
      initiatives that could have a material effect upon the financial position
      or operating results of CN and the appropriateness of the disclosure
      thereof in the documents reviewed by the
  Committee;
 ●
                                                                reviewing the
      results of the external audit, any significant problems encountered in
      performing the audit, and management’s response and/or action plan related
      to any Management Letter issued by the external auditors and any
      significant recommendations contained
therein.
 B.
                    Monitoring
      risk management and internal
controls
 ●
                        receiving
      periodically management’s report assessing the adequacy and effectiveness
      of CN’s disclosure controls and procedures and systems of internal
      control;
 ●
                                reviewing
      CN’s risk assessment and risk management policies, including CN’s
      insurance coverage (annually and as otherwise may be
      appropriate);
 ●
                                        assisting the
      Board with the oversight of CN’s compliance with applicable legal and
      regulatory requirements;
 ●
                                                reviewing
      CN’s delegation of financial
authority;
 ●
                                                        making
      recommendations with respect to the declaration of
    dividends;
 ●
                                                                while
      ensuring confidentiality and anonymity, establishing procedures for the
      receipt, retention and treatment of complaints received by CN regarding
      accounting, internal accounting controls or auditing matters or employee
      concerns regarding accounting or auditing
  matters;
 ●
                                                                        requesting
      the performance of any specific audit as
  required.
 C.
                      Monitoring
      internal auditors
 ●
                            ensuring that
      the chief internal auditor reports directly to the Audit
      Committee;
 ●
                            regularly
      monitoring the internal audit function’s performance, its
      responsibilities, staffing, budget and the compensation of its
      members;
 ●
                            reviewing
      annually the internal audit plan;
 ●
                            ensuring that
      the internal auditors are accountable to the Audit Committee and to the
      Board.
 D.
                    Monitoring
      external auditors
  ●
                          recommending
      to the Board and CN’s shareholders the retention and, if appropriate, the
      removal of external auditors, evaluating and remunerating them, and
      monitoring their qualifications, performance and
    independence;
 29
 ●
                    approving and overseeing the disclosure of all audit, review
      and attest services provided by the external auditors, determining which
      non-audit services the external auditors are prohibited from providing,
      and pre-approving and overseeing the disclosure of permitted non-audit
      services by the external auditors to CN or any of its subsidiaries, in
      accordance with applicable laws and
  regulations;
 
 ●
                    reviewing
      recommendations to shareholders on the continued engagement or replacement
      of external auditors, for CN and CN’s Pension Trust
  Funds;
 
 ●
                    ensuring that
      the external auditors are accountable to the Audit Committee and to the
      Board;
 
 ●
                    discussing
      with the external auditors the quality and not just the acceptability of
      CN’s accounting principles, including (i) all critical accounting policies
      and practices used, (ii) any alternative treatments of financial
      information that have been discussed with management, the ramification of
      their use and the treatment preferred by the external auditors, as well as
      (iii) any other material written communications between CN and the
      external auditors (including a disagreement, if any, with management and
      any audit problems or difficulties and management’s
    response);
 
 ●
                    reviewing at
      least annually, a report by the external auditors describing their
      internal quality-control procedures; any material issues raised by their
      most recent internal quality-control review of their firm, or peer review,
      or by any inquiry or investigation by governmental or professional
      authorities, within the preceding five years, respecting one or more
      audits carried out by them, to the extent available, and any steps taken
      to deal with any such issues;
 
 ●
                    reviewing at
      least annually, the formal written statement from the external auditors
      stating all relationships the external auditors have with CN and
      confirming their independence, and holding discussions with the external
      auditors as to any relationship or services that may impact their
      objectivity or independence;
 
 ●
                    reviewing
      hiring policies for employees or former employees of CN’s firm of external
      auditors;
 
 ●
                    ensuring the
      rotation of lead, concurring and other audit partners, to the extent
      required by Canadian Corporate Governance Standards and U.S. Corporate
      Governance Standards.
  E.
                    Evaluating
      the performance of the Audit
Committee
 
 ●
                    ensuring that
      processes are in place to annually evaluate the performance of the Audit
      Committee.
 In addition to the
above responsibilities, the Audit Committee may discharge the responsibilities
of the Finance Committee if no meeting of the Finance Committee is scheduled to
be held in the immediate future.
 
 Because of the
Audit Committee’s demanding role and responsibilities, the Board chair, together
with the Corporate Governance and Nominating Committee chair, reviews any
invitation to Audit Committee members to join the audit committee of another
entity. Where a member of the Audit Committee simultaneously serves on the audit
committee of more than three public companies, including CN, the Board
determines whether such simultaneous service impairs the ability of such member
to effectively serve on the Audit Committee and either requires a correction to
the situation or discloses in CN’s Information Circular that there is no such
impairment.
 
 As appropriate, the
Audit Committee may retain independent advisors to help it carry out its
responsibilities, including fixing such advisors’ fees and retention terms,
subject to advising the Board chair; the Committee makes arrangements for the
appropriate funding for payment of the external auditors and any advisors
retained by it. The Board also provides appropriate funding for all
administrative expenses necessary or appropriate to allow the Audit Committee to
carry out its duties.
 
 30
 
 The
Audit Committee has direct communication channels with the internal and external
auditors to discuss and review specific issues, as appropriate. In addition,
each must meet separately with the Audit Committee, without management, twice a
year, and more frequently as required; the Audit Committee must also meet
separately with management twice a year, and more frequently as
required.
 
 The Audit Committee
shall report to the Board regularly on its deliberations and annually on the
adequacy of its mandate.
 
 Nothing contained
in the above mandate is intended to assign to the Audit Committee the Board’s
responsibility to ensure CN’s compliance with applicable laws or regulations or
to expand applicable standards of liability under statutory or regulatory
requirements for the Directors or the members of the Audit Committee. Even
though the Audit Committee has a specific mandate and its members may have
financial experience and expertise, it is not the duty of the Audit Committee to
plan or conduct audits, or to determine that the Company’s financial statements
are complete and accurate and are in accordance with generally accepted
accounting principles. Such matters are the responsibility of management, the
internal auditors and the external auditors.
 
 Members of the
Audit Committee are entitled to rely, absent knowledge to the contrary, on (i)
the integrity of the persons and organizations from whom they receive
information, (ii) the accuracy and completeness of the information provided, and
(iii) representations made by management as to the non-audit services provided
to the Company by the external auditors.
 
 The Audit
Committee’s oversight responsibilities are not established to provide an
independent basis to determine that (i) management has maintained appropriate
accounting and financial reporting principles or appropriate internal controls
and procedures, or (ii) the Company’s financial statements have been prepared
and, if applicable, audited in accordance with generally accepted accounting
principles or generally accepted auditing standards.
  31
 SIGNATURES
  Pursuant
to the requirements of the Exchange Act, the Registrant certifies that it meets
all of the requirements for filing on Form 40-F and has duly caused this
annual report to be signed on its behalf by the undersigned, thereto duly
authorized.
  CANADIAN
      NATIONAL RAILWAY COMPANYBy:
                /s/
      Sean FinnName:
                Sean
      FinnTitle:
                Executive Vice-President Corporate
                  Services and  Chief
      Legal OfficerDate:
                February
      5, 2009
 EXHIBIT INDEX
 
 Exhibit
      No.
                Description
 99.1
              Management's
      Discussion and Analysis for the year ended December 31,
    2008*
 
 99.2
              Audited
      Annual Consolidated Financial Statements for the year ended December 31,
      2008*
 
 99.3
              Consent
      of KPMG LLP.
 
 99.4
              CEO
      Section 302 Certification.
 
 99.5
              CFO
      Section 302 Certification.
 
 99.6
              CEO
      and CFO Section 906 Certification.
 
 ____________
 *Incorporated
by reference to the Registrant’s Form 6-K dated February 5, 2009.